These 4 Measures Indicate That Shenzhen Yinghe Technology (SZSE:300457) Is Using Debt Reasonably Well

Warren Buffett famously said, '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, Shenzhen Yinghe Technology Co., Ltd (SZSE:300457) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Shenzhen Yinghe Technology

How Much Debt Does Shenzhen Yinghe Technology Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Yinghe Technology had debt of CN¥31.5m at the end of March 2024, a reduction from CN¥44.1m over a year. But on the other hand it also has CN¥2.38b in cash, leading to a CN¥2.35b net cash position.

How Healthy Is Shenzhen Yinghe Technology's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Yinghe Technology had liabilities of CN¥9.72b falling due within a year, and liabilities of CN¥109.5m due beyond that. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥7.17b due within 12 months. So it has liabilities totalling CN¥273.9m more than its cash and near-term receivables, combined.

Of course, Shenzhen Yinghe Technology has a market capitalization of CN¥12.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shenzhen Yinghe Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Shenzhen Yinghe Technology grew its EBIT by 112% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Shenzhen Yinghe Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen Yinghe Technology 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, Shenzhen Yinghe Technology recorded free cash flow of 30% 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 Shenzhen Yinghe Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥2.35b. And it impressed us with its EBIT growth of 112% over the last year. So we don't think Shenzhen Yinghe Technology's use of debt is 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. Be aware that Shenzhen Yinghe Technology is showing 2 warning signs in our investment analysis , you should know about...

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.

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