These 4 Measures Indicate That State Grid YingdaLtd (SHSE:600517) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, State Grid Yingda Co.,Ltd. (SHSE:600517) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for State Grid YingdaLtd

How Much Debt Does State Grid YingdaLtd Carry?

The image below, which you can click on for greater detail, shows that State Grid YingdaLtd had debt of CN¥7.89b at the end of June 2024, a reduction from CN¥10.9b over a year. However, it does have CN¥26.4b in cash offsetting this, leading to net cash of CN¥18.5b.

How Healthy Is State Grid YingdaLtd's Balance Sheet?

The latest balance sheet data shows that State Grid YingdaLtd had liabilities of CN¥19.8b due within a year, and liabilities of CN¥601.2m falling due after that. Offsetting these obligations, it had cash of CN¥26.4b as well as receivables valued at CN¥6.53b due within 12 months. So it actually has CN¥12.6b more liquid assets than total liabilities.

This surplus liquidity suggests that State Grid YingdaLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, State Grid YingdaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, State Grid YingdaLtd saw its EBIT drop by 2.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, State Grid YingdaLtd recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that State Grid YingdaLtd has net cash of CN¥18.5b, as well as more liquid assets than liabilities. So is State Grid YingdaLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for State Grid YingdaLtd you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.