Here's Why Yunnan Botanee Bio-Technology GroupLTD (SZSE:300957) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Yunnan Botanee Bio-Technology GroupLTD

What Is Yunnan Botanee Bio-Technology GroupLTD's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yunnan Botanee Bio-Technology GroupLTD had CN¥567.3m of debt, an increase on none, over one year. However, it does have CN¥3.14b in cash offsetting this, leading to net cash of CN¥2.58b.

How Strong Is Yunnan Botanee Bio-Technology GroupLTD's Balance Sheet?

The latest balance sheet data shows that Yunnan Botanee Bio-Technology GroupLTD had liabilities of CN¥1.21b due within a year, and liabilities of CN¥547.6m falling due after that. Offsetting these obligations, it had cash of CN¥3.14b as well as receivables valued at CN¥969.8m due within 12 months. So it actually has CN¥2.36b more liquid assets than total liabilities.

This surplus suggests that Yunnan Botanee Bio-Technology GroupLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yunnan Botanee Bio-Technology GroupLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Yunnan Botanee Bio-Technology GroupLTD if management cannot prevent a repeat of the 61% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yunnan Botanee Bio-Technology GroupLTD'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yunnan Botanee Bio-Technology GroupLTD 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. Looking at the most recent three years, Yunnan Botanee Bio-Technology GroupLTD recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yunnan Botanee Bio-Technology GroupLTD has CN¥2.58b in net cash and a decent-looking balance sheet. So we are not troubled with Yunnan Botanee Bio-Technology GroupLTD's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Yunnan Botanee Bio-Technology GroupLTD you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.