Is Yangmei ChemicalLtd (SHSE:600691) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Yangmei Chemical Co.,Ltd (SHSE:600691) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yangmei ChemicalLtd

What Is Yangmei ChemicalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Yangmei ChemicalLtd had debt of CN¥12.6b, up from CN¥9.74b in one year. However, it also had CN¥7.16b in cash, and so its net debt is CN¥5.41b.

How Healthy Is Yangmei ChemicalLtd's Balance Sheet?

According to the last reported balance sheet, Yangmei ChemicalLtd had liabilities of CN¥16.1b due within 12 months, and liabilities of CN¥1.64b due beyond 12 months. Offsetting this, it had CN¥7.16b in cash and CN¥2.24b in receivables that were due within 12 months. So it has liabilities totalling CN¥8.38b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥5.89b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yangmei ChemicalLtd 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.

In the last year Yangmei ChemicalLtd had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥15b. That makes us nervous, to say the least.

Caveat Emptor

While Yangmei ChemicalLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥365m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥352m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Yangmei ChemicalLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.