Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) Has A Pretty Healthy Balance Sheet

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 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. We can see that Beijing Oriental Yuhong Waterproof Technology Co., Ltd. (SZSE:002271) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Oriental Yuhong Waterproof Technology

What Is Beijing Oriental Yuhong Waterproof Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Oriental Yuhong Waterproof Technology had debt of CN¥8.26b, up from CN¥6.87b in one year. However, it also had CN¥6.27b in cash, and so its net debt is CN¥1.99b.

How Strong Is Beijing Oriental Yuhong Waterproof Technology's Balance Sheet?

The latest balance sheet data shows that Beijing Oriental Yuhong Waterproof Technology had liabilities of CN¥18.5b due within a year, and liabilities of CN¥2.43b falling due after that. Offsetting this, it had CN¥6.27b in cash and CN¥16.6b in receivables that were due within 12 months. So it actually has CN¥1.96b more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Oriental Yuhong Waterproof Technology could probably pay off its debt with ease, as its balance sheet is far from stretched.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Beijing Oriental Yuhong Waterproof Technology has a low net debt to EBITDA ratio of only 0.65. And its EBIT easily covers its interest expense, being 25.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Beijing Oriental Yuhong Waterproof Technology's load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Beijing Oriental Yuhong Waterproof Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Beijing Oriental Yuhong Waterproof Technology's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Based on what we've seen Beijing Oriental Yuhong Waterproof Technology is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. Considering this range of data points, we think Beijing Oriental Yuhong Waterproof Technology is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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 2 warning signs we've spotted with Beijing Oriental Yuhong Waterproof Technology .

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.