Shanghai Yaoji Technology (SZSE:002605) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Shanghai Yaoji Technology Co., Ltd. (SZSE:002605) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Shanghai Yaoji Technology had CN¥435.0m of debt in September 2023, down from CN¥566.2m, one year before. However, its balance sheet shows it holds CN¥742.1m in cash, so it actually has CN¥307.1m net cash.

How Strong Is Shanghai Yaoji Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai Yaoji Technology had liabilities of CN¥1.24b due within a year, and liabilities of CN¥147.0m falling due after that. On the other hand, it had cash of CN¥742.1m and CN¥597.3m worth of receivables due within a year. So it has liabilities totalling CN¥48.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Shanghai Yaoji Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥10.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shanghai Yaoji Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Shanghai Yaoji Technology grew its EBIT by 184% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shanghai Yaoji Technology'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Yaoji 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. Over the most recent three years, Shanghai Yaoji Technology recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai Yaoji Technology has CN¥307.1m in net cash. And it impressed us with its EBIT growth of 184% over the last year. So is Shanghai Yaoji Technology's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Shanghai Yaoji Technology that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.