Here's Why Hainan Yedao (Group)Ltd (SHSE:600238) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Hainan Yedao (Group) Co.,Ltd (SHSE:600238) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hainan Yedao (Group)Ltd

What Is Hainan Yedao (Group)Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that Hainan Yedao (Group)Ltd had debt of CN¥231.5m at the end of March 2024, a reduction from CN¥274.4m over a year. However, because it has a cash reserve of CN¥19.0m, its net debt is less, at about CN¥212.5m.

How Strong Is Hainan Yedao (Group)Ltd's Balance Sheet?

The latest balance sheet data shows that Hainan Yedao (Group)Ltd had liabilities of CN¥518.4m due within a year, and liabilities of CN¥207.6m falling due after that. Offsetting these obligations, it had cash of CN¥19.0m as well as receivables valued at CN¥120.3m due within 12 months. So its liabilities total CN¥586.7m more than the combination of its cash and short-term receivables.

Given Hainan Yedao (Group)Ltd has a market capitalization of CN¥3.68b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hainan Yedao (Group)Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hainan Yedao (Group)Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥203m, which is a fall of 37%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hainan Yedao (Group)Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥59m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥41m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hainan Yedao (Group)Ltd is showing 2 warning signs in our investment analysis , you should know about...

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.

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