Does Zhejiang Yongtai TechnologyLtd (SZSE:002326) Have A Healthy Balance Sheet?

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.' 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 Zhejiang Yongtai Technology Co.,Ltd. (SZSE:002326) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhejiang Yongtai TechnologyLtd

What Is Zhejiang Yongtai TechnologyLtd's Net Debt?

As you can see below, Zhejiang Yongtai TechnologyLtd had CN¥4.39b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥804.7m in cash leading to net debt of about CN¥3.58b.

A Look At Zhejiang Yongtai TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Zhejiang Yongtai TechnologyLtd had liabilities of CN¥6.39b falling due within a year, and liabilities of CN¥1.82b due beyond that. Offsetting these obligations, it had cash of CN¥804.7m as well as receivables valued at CN¥1.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.79b.

While this might seem like a lot, it is not so bad since Zhejiang Yongtai TechnologyLtd has a market capitalization of CN¥9.79b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Yongtai TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Zhejiang Yongtai TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 4.3%, to CN¥4.4b. That's not what we would hope to see.

Caveat Emptor

Importantly, Zhejiang Yongtai TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥604m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥848m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhejiang Yongtai TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

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.