Xinjiang Yilite IndustryLtd (SHSE:600197) Has A Pretty Healthy Balance Sheet

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.' 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, Xinjiang Yilite Industry Co.,Ltd (SHSE:600197) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Xinjiang Yilite IndustryLtd

What Is Xinjiang Yilite IndustryLtd's Net Debt?

As you can see below, Xinjiang Yilite IndustryLtd had CN¥190.5m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥529.7m in cash to offset that, meaning it has CN¥339.2m net cash.

A Look At Xinjiang Yilite IndustryLtd's Liabilities

The latest balance sheet data shows that Xinjiang Yilite IndustryLtd had liabilities of CN¥684.9m due within a year, and liabilities of CN¥199.5m falling due after that. Offsetting this, it had CN¥529.7m in cash and CN¥213.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥141.2m more than its cash and near-term receivables, combined.

This state of affairs indicates that Xinjiang Yilite IndustryLtd'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¥9.94b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

And we also note warmly that Xinjiang Yilite IndustryLtd grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. Xinjiang Yilite IndustryLtd 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. Considering the last three years, Xinjiang Yilite IndustryLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥339.2m. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Xinjiang Yilite IndustryLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Xinjiang Yilite IndustryLtd that you should be aware of.

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.