Shanghai Yaoji Technology (SZSE:002605) Has A Pretty Healthy Balance Sheet

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. Importantly, Shanghai Yaoji Technology Co., Ltd. (SZSE:002605) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Shanghai Yaoji Technology

What Is Shanghai Yaoji Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shanghai Yaoji Technology had CN¥672.2m of debt, an increase on CN¥435.0m, over one year. However, its balance sheet shows it holds CN¥819.2m in cash, so it actually has CN¥146.9m net cash.

How Healthy Is Shanghai Yaoji Technology's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Yaoji Technology had liabilities of CN¥820.0m falling due within a year, and liabilities of CN¥669.9m due beyond that. Offsetting these obligations, it had cash of CN¥819.2m as well as receivables valued at CN¥624.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥46.2m.

Having regard to Shanghai Yaoji Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥11.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Shanghai Yaoji Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shanghai Yaoji Technology's load is not too heavy, because its EBIT was down 31% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Shanghai Yaoji Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥146.9m. So we don't have any problem with Shanghai Yaoji Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai Yaoji Technology is showing 1 warning sign in our investment analysis , you should know about...

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.