Does Foshan Yowant TechnologyLtd (SZSE:002291) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Foshan Yowant Technology Co.,Ltd (SZSE:002291) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Foshan Yowant TechnologyLtd

What Is Foshan Yowant TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Foshan Yowant TechnologyLtd had debt of CN¥812.6m, up from CN¥642.3m in one year. However, because it has a cash reserve of CN¥739.9m, its net debt is less, at about CN¥72.7m.

A Look At Foshan Yowant TechnologyLtd's Liabilities

According to the last reported balance sheet, Foshan Yowant TechnologyLtd had liabilities of CN¥1.51b due within 12 months, and liabilities of CN¥50.1m due beyond 12 months. Offsetting this, it had CN¥739.9m in cash and CN¥1.41b in receivables that were due within 12 months. So it can boast CN¥590.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Foshan Yowant TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Foshan Yowant TechnologyLtd has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Foshan Yowant TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Foshan Yowant TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to CN¥4.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Foshan Yowant TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥974m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. Case in point: We've spotted 2 warning signs for Foshan Yowant TechnologyLtd you should be aware of, and 1 of them is potentially serious.

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.