Is YONFER Agricultural Technology (SZSE:000902) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that YONFER Agricultural Technology Co., Ltd. (SZSE:000902) does use debt in its business. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for YONFER Agricultural Technology

What Is YONFER Agricultural Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 YONFER Agricultural Technology had CN¥1.76b of debt, an increase on CN¥1.35b, over one year. But on the other hand it also has CN¥2.35b in cash, leading to a CN¥587.0m net cash position.

A Look At YONFER Agricultural Technology's Liabilities

According to the last reported balance sheet, YONFER Agricultural Technology had liabilities of CN¥4.63b due within 12 months, and liabilities of CN¥2.23b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.35b as well as receivables valued at CN¥552.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.96b.

This deficit isn't so bad because YONFER Agricultural Technology is worth CN¥16.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, YONFER Agricultural Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that YONFER Agricultural Technology has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine YONFER Agricultural Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While YONFER Agricultural 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. In the last three years, YONFER Agricultural Technology basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While YONFER Agricultural Technology does have more liabilities than liquid assets, it also has net cash of CN¥587.0m. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't have any problem with YONFER Agricultural Technology's use of debt. 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 1 warning sign for YONFER Agricultural Technology that you should be aware of.

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.