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

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Sichuan Yahua Industrial Group

How Much Debt Does Sichuan Yahua Industrial Group Carry?

You can click the graphic below for the historical numbers, but it shows that Sichuan Yahua Industrial Group had CN¥973.1m of debt in September 2024, down from CN¥1.58b, one year before. But it also has CN¥3.31b in cash to offset that, meaning it has CN¥2.34b net cash.

How Strong Is Sichuan Yahua Industrial Group's Balance Sheet?

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 these obligations, it had cash of CN¥3.31b as well as receivables valued at CN¥1.93b due within 12 months. So it actually has CN¥2.26b more liquid assets than total liabilities.

This surplus suggests that Sichuan Yahua Industrial Group is using debt in a way that is appears to be both safe and conservative. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. That makes us nervous, to say the least.

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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.