State Grid YingdaLtd (SHSE:600517) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies State Grid Yingda Co.,Ltd. (SHSE:600517) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for State Grid YingdaLtd

What Is State Grid YingdaLtd's Debt?

As you can see below, State Grid YingdaLtd had CN¥6.01b of debt at September 2024, down from CN¥9.99b a year prior. However, it does have CN¥25.4b in cash offsetting this, leading to net cash of CN¥19.4b.

A Look At State Grid YingdaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that State Grid YingdaLtd had liabilities of CN¥19.2b due within 12 months and liabilities of CN¥567.4m due beyond that. Offsetting these obligations, it had cash of CN¥25.4b as well as receivables valued at CN¥5.99b due within 12 months. So it actually has CN¥11.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that State Grid YingdaLtd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, State Grid YingdaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that State Grid YingdaLtd saw its EBIT decline by 3.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is State Grid YingdaLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. State Grid YingdaLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, State Grid YingdaLtd produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case State Grid YingdaLtd has CN¥19.4b in net cash and a decent-looking balance sheet. So is State Grid YingdaLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for State Grid YingdaLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.