Yunnan Botanee Bio-Technology GroupLTD (SZSE:300957) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Yunnan Botanee Bio-Technology Group Co.LTD (SZSE:300957) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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.

View 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 2023 Yunnan Botanee Bio-Technology GroupLTD had CN¥47.6m of debt, an increase on none, over one year. But it also has CN¥3.56b in cash to offset that, meaning it has CN¥3.51b net cash.

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¥856.3m falling due within a year, and liabilities of CN¥192.5m due beyond that. On the other hand, it had cash of CN¥3.56b and CN¥710.6m worth of receivables due within a year. So it actually has CN¥3.22b 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. Succinctly put, Yunnan Botanee Bio-Technology GroupLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Yunnan Botanee Bio-Technology GroupLTD grew its EBIT by 10.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Yunnan Botanee Bio-Technology GroupLTD recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yunnan Botanee Bio-Technology GroupLTD has net cash of CN¥3.51b, as well as more liquid assets than liabilities. And it also grew its EBIT by 10.0% over the last year. So is Yunnan Botanee Bio-Technology GroupLTD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Yunnan Botanee Bio-Technology GroupLTD (1 is potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.