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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Shenzhen Yinghe Technology Co., Ltd (SZSE:300457) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Yinghe Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shenzhen Yinghe Technology had CN¥155.4m of debt, an increase on CN¥43.3m, over one year. However, its balance sheet shows it holds CN¥1.43b in cash, so it actually has CN¥1.27b net cash.

How Strong Is Shenzhen Yinghe Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Yinghe Technology had liabilities of CN¥7.65b due within a year, and liabilities of CN¥62.5m falling due after that. On the other hand, it had cash of CN¥1.43b and CN¥7.18b worth of receivables due within a year. So it actually has CN¥893.9m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Yinghe Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Yinghe Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Shenzhen Yinghe Technology

And we also note warmly that Shenzhen Yinghe Technology grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Yinghe Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Shenzhen Yinghe Technology created free cash flow amounting to 5.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Yinghe Technology has net cash of CN¥1.27b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we don't have any problem with Shenzhen Yinghe Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Shenzhen Yinghe Technology that you should be aware of.

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.