Yunnan Aluminium (SZSE:000807) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yunnan Aluminium Co., Ltd. (SZSE:000807) does carry debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yunnan Aluminium

How Much Debt Does Yunnan Aluminium Carry?

The image below, which you can click on for greater detail, shows that Yunnan Aluminium had debt of CN¥3.71b at the end of September 2024, a reduction from CN¥4.47b over a year. However, it does have CN¥8.20b in cash offsetting this, leading to net cash of CN¥4.49b.

How Strong Is Yunnan Aluminium's Balance Sheet?

The latest balance sheet data shows that Yunnan Aluminium had liabilities of CN¥8.06b due within a year, and liabilities of CN¥2.51b falling due after that. Offsetting these obligations, it had cash of CN¥8.20b as well as receivables valued at CN¥966.9m due within 12 months. So it has liabilities totalling CN¥1.41b more than its cash and near-term receivables, combined.

Of course, Yunnan Aluminium has a market capitalization of CN¥59.8b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Yunnan Aluminium also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Yunnan Aluminium grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its 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 Yunnan Aluminium 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. Yunnan Aluminium may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Yunnan Aluminium generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Yunnan Aluminium's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.49b. And it impressed us with free cash flow of CN¥6.3b, being 96% of its EBIT. So we don't think Yunnan Aluminium's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Yunnan Aluminium .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.