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

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Xinjiang Yilite IndustryLtd

What Is Xinjiang Yilite IndustryLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Xinjiang Yilite IndustryLtd had CN¥189.9m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥414.8m in cash, so it actually has CN¥224.9m net cash.

How Strong Is Xinjiang Yilite IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Xinjiang Yilite IndustryLtd had liabilities of CN¥930.9m due within a year, and liabilities of CN¥198.0m falling due after that. Offsetting these obligations, it had cash of CN¥414.8m as well as receivables valued at CN¥266.0m due within 12 months. So its liabilities total CN¥448.0m more than the combination of its cash and short-term receivables.

Since publicly traded Xinjiang Yilite IndustryLtd shares are worth a total of CN¥7.73b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Xinjiang Yilite IndustryLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Xinjiang Yilite IndustryLtd grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xinjiang Yilite IndustryLtd's ability to maintain a healthy balance sheet going forward. 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. 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 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Xinjiang Yilite IndustryLtd has CN¥224.9m in net cash. And we liked the look of last year's 39% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Xinjiang Yilite IndustryLtd , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.