Would Zhejiang Yongtai TechnologyLtd (SZSE:002326) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Yongtai TechnologyLtd

What Is Zhejiang Yongtai TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Zhejiang Yongtai TechnologyLtd had CN¥4.24b of debt, an increase on CN¥3.34b, over one year. However, it also had CN¥1.36b in cash, and so its net debt is CN¥2.89b.

How Healthy Is Zhejiang Yongtai TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Yongtai TechnologyLtd had liabilities of CN¥5.07b due within 12 months, and liabilities of CN¥2.51b due beyond 12 months. On the other hand, it had cash of CN¥1.36b and CN¥938.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.28b.

This deficit isn't so bad because Zhejiang Yongtai TechnologyLtd is worth CN¥9.46b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Yongtai TechnologyLtd'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.

Over 12 months, Zhejiang Yongtai TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.6b, which is a fall of 25%. 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). To be specific the EBIT loss came in at CN¥93m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥737m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 4 warning signs for Zhejiang Yongtai TechnologyLtd (3 are a bit unpleasant!) that you should be aware of before investing here.

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.