These 4 Measures Indicate That Shandong Yulong Gold (SHSE:601028) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Shandong Yulong Gold Co., Ltd. (SHSE:601028) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shandong Yulong Gold

What Is Shandong Yulong Gold's Net Debt?

As you can see below, at the end of September 2023, Shandong Yulong Gold had CN¥1.27b of debt, up from CN¥507.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.40b in cash, so it actually has CN¥127.0m net cash.

How Healthy Is Shandong Yulong Gold's Balance Sheet?

We can see from the most recent balance sheet that Shandong Yulong Gold had liabilities of CN¥4.97b falling due within a year, and liabilities of CN¥833.5m due beyond that. Offsetting this, it had CN¥1.40b in cash and CN¥3.74b in receivables that were due within 12 months. So it has liabilities totalling CN¥656.2m more than its cash and near-term receivables, combined.

Given Shandong Yulong Gold has a market capitalization of CN¥8.62b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shandong Yulong Gold boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Shandong Yulong Gold grew its EBIT by 181% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shandong Yulong Gold can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shandong Yulong Gold has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Shandong Yulong Gold recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Shandong Yulong Gold's liabilities, but we can be reassured by the fact it has has net cash of CN¥127.0m. And we liked the look of last year's 181% year-on-year EBIT growth. So is Shandong Yulong Gold's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shandong Yulong Gold's earnings per share history for free.

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.