We Think Shenzhen Yinghe Technology (SZSE:300457) Can Stay On Top Of Its 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. 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?

When Is Debt A Problem?

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. 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. 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 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 Shenzhen Yinghe Technology

What Is Shenzhen Yinghe Technology's 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. But on the other hand it also has CN¥1.43b in cash, leading to a CN¥1.27b net cash position.

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. Offsetting this, it had CN¥1.43b in cash and CN¥7.18b in receivables that were due within 12 months. So it can boast 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. Simply put, the fact that Shenzhen Yinghe Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Shenzhen Yinghe Technology grew its EBIT by 11% last year, making its debt load easier to handle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't have any problem with Shenzhen Yinghe Technology's use of debt. 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. For example, we've discovered 2 warning signs for Shenzhen Yinghe Technology (1 is concerning!) 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.