We Think YOUNGY (SZSE:002192) Can Stay On Top Of Its Debt

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. As with many other companies YOUNGY Co., Ltd. (SZSE:002192) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for YOUNGY

How Much Debt Does YOUNGY Carry?

The image below, which you can click on for greater detail, shows that YOUNGY had debt of CN¥45.0m at the end of September 2024, a reduction from CN¥105.0m over a year. However, it does have CN¥1.47b in cash offsetting this, leading to net cash of CN¥1.42b.

How Healthy Is YOUNGY's Balance Sheet?

The latest balance sheet data shows that YOUNGY had liabilities of CN¥519.0m due within a year, and liabilities of CN¥372.9m falling due after that. Offsetting these obligations, it had cash of CN¥1.47b as well as receivables valued at CN¥192.6m due within 12 months. So it can boast CN¥769.8m more liquid assets than total liabilities.

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

Shareholders should be aware that YOUNGY's EBIT was down 98% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is YOUNGY's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. YOUNGY 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, YOUNGY produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case YOUNGY has CN¥1.42b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥101m. So we don't have any problem with YOUNGY's use of debt. 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 - YOUNGY has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.