Yindu Kitchen Equipment (SHSE:603277) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Yindu Kitchen Equipment Co., Ltd (SHSE:603277) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Yindu Kitchen Equipment

How Much Debt Does Yindu Kitchen Equipment Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yindu Kitchen Equipment had CN¥348.8m of debt, an increase on CN¥215.8m, over one year. But on the other hand it also has CN¥1.49b in cash, leading to a CN¥1.15b net cash position.

How Strong Is Yindu Kitchen Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yindu Kitchen Equipment had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥343.8m due beyond that. Offsetting this, it had CN¥1.49b in cash and CN¥369.2m in receivables that were due within 12 months. So it can boast CN¥458.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Yindu Kitchen Equipment could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Yindu Kitchen Equipment has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Yindu Kitchen Equipment grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yindu Kitchen Equipment's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yindu Kitchen Equipment 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. Over the most recent three years, Yindu Kitchen Equipment recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Yindu Kitchen Equipment has CN¥1.15b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥369m, being 80% of its EBIT. So we don't think Yindu Kitchen Equipment's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Yindu Kitchen Equipment you should know about.

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.