Is Shanghai Yaoji Technology (SZSE:002605) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shanghai Yaoji Technology Co., Ltd. (SZSE:002605) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Yaoji Technology

What Is Shanghai Yaoji Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shanghai Yaoji Technology had CN¥873.9m of debt, an increase on CN¥486.1m, over one year. But on the other hand it also has CN¥1.21b in cash, leading to a CN¥339.6m net cash position.

How Strong Is Shanghai Yaoji Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai Yaoji Technology had liabilities of CN¥1.12b due within a year, and liabilities of CN¥655.0m falling due after that. Offsetting this, it had CN¥1.21b in cash and CN¥761.7m in receivables that were due within 12 months. So it can boast CN¥201.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Yaoji Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Yaoji Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Shanghai Yaoji Technology has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. 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 Shanghai Yaoji 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. Shanghai Yaoji Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shanghai Yaoji Technology produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Yaoji Technology has net cash of CN¥339.6m, as well as more liquid assets than liabilities. So we don't think Shanghai Yaoji Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shanghai Yaoji Technology , and understanding them should be part of your investment process.

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