Does Shenzhen YHLO Biotech (SHSE:688575) Have A Healthy Balance Sheet?

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. We can see that Shenzhen YHLO Biotech Co., Ltd. (SHSE:688575) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Shenzhen YHLO Biotech

What Is Shenzhen YHLO Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen YHLO Biotech had CN¥579.6m of debt, an increase on CN¥453.5m, over one year. But on the other hand it also has CN¥653.3m in cash, leading to a CN¥73.6m net cash position.

How Strong Is Shenzhen YHLO Biotech's Balance Sheet?

According to the last reported balance sheet, Shenzhen YHLO Biotech had liabilities of CN¥792.1m due within 12 months, and liabilities of CN¥480.5m due beyond 12 months. On the other hand, it had cash of CN¥653.3m and CN¥460.8m worth of receivables due within a year. So its liabilities total CN¥158.5m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Shenzhen YHLO Biotech'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¥12.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Shenzhen YHLO Biotech also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Shenzhen YHLO Biotech if management cannot prevent a repeat of the 72% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Shenzhen YHLO Biotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Shenzhen YHLO Biotech 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. Over the last three years, Shenzhen YHLO Biotech reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about Shenzhen YHLO Biotech's liabilities, but we can be reassured by the fact it has has net cash of CN¥73.6m. So we are not troubled with Shenzhen YHLO Biotech'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. To that end, you should learn about the 2 warning signs we've spotted with Shenzhen YHLO Biotech (including 1 which is a bit unpleasant) .

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.

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