Here's Why Zhejiang Yongtai TechnologyLtd (SZSE:002326) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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

How Much Debt Does Zhejiang Yongtai TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhejiang Yongtai TechnologyLtd had CN¥4.48b of debt, an increase on CN¥3.88b, over one year. On the flip side, it has CN¥898.5m in cash leading to net debt of about CN¥3.58b.

A Look At Zhejiang Yongtai TechnologyLtd's Liabilities

According to the last reported balance sheet, Zhejiang Yongtai TechnologyLtd had liabilities of CN¥5.98b due within 12 months, and liabilities of CN¥1.68b due beyond 12 months. Offsetting these obligations, it had cash of CN¥898.5m as well as receivables valued at CN¥1.04b due within 12 months. So it has liabilities totalling CN¥5.72b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥7.26b, so it does suggest shareholders should keep an eye on Zhejiang Yongtai TechnologyLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 29%, to CN¥3.9b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zhejiang Yongtai TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥753m 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¥978m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Zhejiang Yongtai TechnologyLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com