Is Qingdao Yunlu Advanced Materials Technology (SHSE:688190) A Risky Investment?

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.' 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 note that Qingdao Yunlu Advanced Materials Technology Co., Ltd. (SHSE:688190) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Qingdao Yunlu Advanced Materials Technology's Net Debt?

As you can see below, at the end of September 2024, Qingdao Yunlu Advanced Materials Technology had CN¥39.2m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥289.8m in cash, so it actually has CN¥250.6m net cash.

How Healthy Is Qingdao Yunlu Advanced Materials Technology's Balance Sheet?

The latest balance sheet data shows that Qingdao Yunlu Advanced Materials Technology had liabilities of CN¥502.7m due within a year, and liabilities of CN¥114.2m falling due after that. On the other hand, it had cash of CN¥289.8m and CN¥681.0m worth of receivables due within a year. So it can boast CN¥353.9m more liquid assets than total liabilities.

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

See our latest analysis for Qingdao Yunlu Advanced Materials Technology

Also good is that Qingdao Yunlu Advanced Materials Technology grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Qingdao Yunlu Advanced Materials Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Qingdao Yunlu Advanced Materials Technology 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. Looking at the most recent three years, Qingdao Yunlu Advanced Materials Technology recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qingdao Yunlu Advanced Materials Technology has net cash of CN¥250.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So is Qingdao Yunlu Advanced Materials Technology'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 example, we've discovered 2 warning signs for Qingdao Yunlu Advanced Materials Technology that you should be aware of before investing here.

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.