Is Sichuan Yahua Industrial Group (SZSE:002497) A Risky Investment?

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.' 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 note that Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sichuan Yahua Industrial Group

What Is Sichuan Yahua Industrial Group's Debt?

As you can see below, Sichuan Yahua Industrial Group had CN¥973.1m of debt at September 2024, down from CN¥1.58b a year prior. But it also has CN¥3.31b in cash to offset that, meaning it has CN¥2.34b net cash.

A Look At Sichuan Yahua Industrial Group's Liabilities

We can see from the most recent balance sheet that Sichuan Yahua Industrial Group had liabilities of CN¥2.26b falling due within a year, and liabilities of CN¥723.5m due beyond that. Offsetting this, it had CN¥3.31b in cash and CN¥1.93b in receivables that were due within 12 months. So it can boast CN¥2.26b more liquid assets than total liabilities.

It's good to see that Sichuan Yahua Industrial Group 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. Simply put, the fact that Sichuan Yahua Industrial Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Sichuan Yahua Industrial Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sichuan Yahua Industrial Group had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥8.3b. To be frank that doesn't bode well.

So How Risky Is Sichuan Yahua Industrial Group?

While Sichuan Yahua Industrial Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥695m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sichuan Yahua Industrial Group's profit, revenue, and operating cashflow have changed over the last few years.

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.