We Think Xinjiang Yilite IndustryLtd (SHSE:600197) Can Stay On Top Of Its Debt

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. As with many other companies Xinjiang Yilite Industry Co.,Ltd (SHSE:600197) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xinjiang Yilite IndustryLtd

What Is Xinjiang Yilite IndustryLtd's Debt?

As you can see below, Xinjiang Yilite IndustryLtd had CN¥190.2m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥664.3m in cash to offset that, meaning it has CN¥474.0m net cash.

A Look At Xinjiang Yilite IndustryLtd's Liabilities

The latest balance sheet data shows that Xinjiang Yilite IndustryLtd had liabilities of CN¥883.4m due within a year, and liabilities of CN¥202.8m falling due after that. Offsetting this, it had CN¥664.3m in cash and CN¥256.2m in receivables that were due within 12 months. So its liabilities total CN¥165.8m more than the combination of its cash and short-term receivables.

Of course, Xinjiang Yilite IndustryLtd has a market capitalization of CN¥7.17b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Xinjiang Yilite IndustryLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Xinjiang Yilite IndustryLtd grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. 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 Xinjiang Yilite IndustryLtd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xinjiang Yilite IndustryLtd 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. Considering the last three years, Xinjiang Yilite IndustryLtd actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Xinjiang Yilite IndustryLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥474.0m. And it impressed us with its EBIT growth of 73% over the last year. So we don't have any problem with Xinjiang Yilite IndustryLtd'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. For instance, we've identified 1 warning sign for Xinjiang Yilite IndustryLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.