Is Beijing Oriental Yuhong Waterproof Technology (SZSE:002271) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Beijing Oriental Yuhong Waterproof Technology Co., Ltd. (SZSE:002271) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing Oriental Yuhong Waterproof Technology

What Is Beijing Oriental Yuhong Waterproof Technology's Net Debt?

As you can see below, Beijing Oriental Yuhong Waterproof Technology had CN¥5.54b of debt at March 2024, down from CN¥6.03b a year prior. But on the other hand it also has CN¥5.82b in cash, leading to a CN¥279.7m net cash position.

A Look At Beijing Oriental Yuhong Waterproof Technology's Liabilities

According to the last reported balance sheet, Beijing Oriental Yuhong Waterproof Technology had liabilities of CN¥17.0b due within 12 months, and liabilities of CN¥2.26b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.82b as well as receivables valued at CN¥19.4b due within 12 months. So it can boast CN¥5.95b more liquid assets than total liabilities.

It's good to see that Beijing Oriental Yuhong Waterproof Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Beijing Oriental Yuhong Waterproof Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Beijing Oriental Yuhong Waterproof Technology grew its EBIT by 17% last year, making its debt load easier to handle. 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 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Beijing Oriental Yuhong Waterproof Technology 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. Over the last three years, Beijing Oriental Yuhong Waterproof Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Oriental Yuhong Waterproof Technology has net cash of CN¥279.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So we are not troubled with Beijing Oriental Yuhong Waterproof Technology's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Oriental Yuhong Waterproof Technology .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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