These 4 Measures Indicate That Zhejiang Yilida VentilatorLtd (SZSE:002686) Is Using Debt Extensively

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 Zhejiang Yilida Ventilator Co.,Ltd. (SZSE:002686) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhejiang Yilida VentilatorLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Zhejiang Yilida VentilatorLtd had debt of CN¥450.1m, up from CN¥420.9m in one year. However, it does have CN¥424.7m in cash offsetting this, leading to net debt of about CN¥25.5m.

How Healthy Is Zhejiang Yilida VentilatorLtd's Balance Sheet?

The latest balance sheet data shows that Zhejiang Yilida VentilatorLtd had liabilities of CN¥1.14b due within a year, and liabilities of CN¥133.6m falling due after that. Offsetting these obligations, it had cash of CN¥424.7m as well as receivables valued at CN¥563.5m due within 12 months. So it has liabilities totalling CN¥284.2m more than its cash and near-term receivables, combined.

Given Zhejiang Yilida VentilatorLtd has a market capitalization of CN¥4.01b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Zhejiang Yilida VentilatorLtd has a very light debt load indeed.

Check out our latest analysis for Zhejiang Yilida VentilatorLtd

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.21 and interest cover of 4.5 times, it seems to us that Zhejiang Yilida VentilatorLtd is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Shareholders should be aware that Zhejiang Yilida VentilatorLtd's EBIT was down 26% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang Yilida VentilatorLtd will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Zhejiang Yilida VentilatorLtd reported free cash flow worth 2.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Zhejiang Yilida VentilatorLtd's struggle to grow its EBIT had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example its net debt to EBITDA was refreshing. Taking the abovementioned factors together we do think Zhejiang Yilida VentilatorLtd's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. Case in point: We've spotted 2 warning signs for Zhejiang Yilida VentilatorLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.