YanKer shop FoodLtd (SZSE:002847) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies YanKer shop Food Co.,Ltd (SZSE:002847) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for YanKer shop FoodLtd

What Is YanKer shop FoodLtd's Debt?

The image below, which you can click on for greater detail, shows that YanKer shop FoodLtd had debt of CN¥375.3m at the end of March 2024, a reduction from CN¥720.0m over a year. But it also has CN¥483.3m in cash to offset that, meaning it has CN¥108.1m net cash.

How Healthy Is YanKer shop FoodLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YanKer shop FoodLtd had liabilities of CN¥1.38b due within 12 months and liabilities of CN¥35.8m due beyond that. On the other hand, it had cash of CN¥483.3m and CN¥214.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥716.0m.

Since publicly traded YanKer shop FoodLtd shares are worth a total of CN¥13.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, YanKer shop FoodLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that YanKer shop FoodLtd has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. 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 YanKer shop FoodLtd 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While YanKer shop FoodLtd 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. During the last three years, YanKer shop FoodLtd produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about YanKer shop FoodLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥108.1m. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think YanKer shop FoodLtd's use of debt is 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. For example, we've discovered 2 warning signs for YanKer shop FoodLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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