Is Zhejiang Yasha DecorationLtd (SZSE:002375) A Risky Investment?

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.' 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 Zhejiang Yasha Decoration Co.,Ltd (SZSE:002375) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Zhejiang Yasha DecorationLtd

What Is Zhejiang Yasha DecorationLtd's Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Yasha DecorationLtd had debt of CN¥1.47b at the end of September 2024, a reduction from CN¥1.75b over a year. But on the other hand it also has CN¥1.80b in cash, leading to a CN¥330.9m net cash position.

How Healthy Is Zhejiang Yasha DecorationLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Yasha DecorationLtd had liabilities of CN¥13.5b due within 12 months, and liabilities of CN¥118.4m due beyond 12 months. On the other hand, it had cash of CN¥1.80b and CN¥12.6b worth of receivables due within a year. So it actually has CN¥804.0m more liquid assets than total liabilities.

It's good to see that Zhejiang Yasha DecorationLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Yasha DecorationLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Zhejiang Yasha DecorationLtd grew its EBIT by 266% 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 Zhejiang Yasha DecorationLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Yasha DecorationLtd 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. Happily for any shareholders, Zhejiang Yasha DecorationLtd actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Yasha DecorationLtd has net cash of CN¥330.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥334m, being 225% of its EBIT. So is Zhejiang Yasha DecorationLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Zhejiang Yasha DecorationLtd you should be aware of.

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.