Stock Analysis

Would Yibin Paper Industry (SHSE:600793) Be Better Off With Less Debt?

SHSE:600793
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Yibin Paper Industry Co., Ltd. (SHSE:600793) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yibin Paper Industry

How Much Debt Does Yibin Paper Industry Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yibin Paper Industry had CN¥1.46b of debt, an increase on CN¥76.6m, over one year. On the flip side, it has CN¥92.9m in cash leading to net debt of about CN¥1.37b.

debt-equity-history-analysis
SHSE:600793 Debt to Equity History December 13th 2024

A Look At Yibin Paper Industry's Liabilities

According to the last reported balance sheet, Yibin Paper Industry had liabilities of CN¥464.2m due within 12 months, and liabilities of CN¥1.48b due beyond 12 months. Offsetting these obligations, it had cash of CN¥92.9m as well as receivables valued at CN¥30.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.82b.

While this might seem like a lot, it is not so bad since Yibin Paper Industry has a market capitalization of CN¥4.18b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yibin Paper Industry will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Yibin Paper Industry made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Yibin Paper Industry's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥103m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥148m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Yibin Paper Industry that you should be aware of.

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.