Is Yunnan Botanee Bio-Technology GroupLTD (SZSE:300957) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its 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 June 2024 Yunnan Botanee Bio-Technology GroupLTD had CN¥592.5m of debt, an increase on none, over one year. However, it does have CN¥3.77b in cash offsetting this, leading to net cash of CN¥3.17b.

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

We can see from the most recent balance sheet that Yunnan Botanee Bio-Technology GroupLTD had liabilities of CN¥1.07b falling due within a year, and liabilities of CN¥554.2m due beyond that. On the other hand, it had cash of CN¥3.77b and CN¥852.6m worth of receivables due within a year. So it actually has CN¥3.00b more liquid assets than total liabilities.

This excess liquidity suggests that Yunnan Botanee Bio-Technology GroupLTD is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Yunnan Botanee Bio-Technology GroupLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Yunnan Botanee Bio-Technology GroupLTD's load is not too heavy, because its EBIT was down 38% 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 Yunnan Botanee Bio-Technology GroupLTD 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yunnan Botanee Bio-Technology GroupLTD 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. In the last three years, Yunnan Botanee Bio-Technology GroupLTD's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yunnan Botanee Bio-Technology GroupLTD has CN¥3.17b in net cash and a decent-looking balance sheet. So we don't have any problem with Yunnan Botanee Bio-Technology GroupLTD's use of debt. 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 Yunnan Botanee Bio-Technology GroupLTD has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.