Is YaGuang Technology Group (SZSE:300123) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that YaGuang Technology Group Company Limited (SZSE:300123) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for YaGuang Technology Group

How Much Debt Does YaGuang Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that YaGuang Technology Group had CN¥1.79b of debt in March 2024, down from CN¥1.95b, one year before. On the flip side, it has CN¥160.2m in cash leading to net debt of about CN¥1.63b.

How Healthy Is YaGuang Technology Group's Balance Sheet?

The latest balance sheet data shows that YaGuang Technology Group had liabilities of CN¥2.87b due within a year, and liabilities of CN¥553.6m falling due after that. Offsetting these obligations, it had cash of CN¥160.2m as well as receivables valued at CN¥2.09b due within 12 months. So its liabilities total CN¥1.17b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because YaGuang Technology Group is worth CN¥4.74b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since YaGuang Technology Group 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.

Over 12 months, YaGuang Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

Not only did YaGuang Technology Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥301m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for YaGuang Technology Group that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com