Sichuan Yahua Industrial Group (SZSE:002497) Has Debt But No Earnings; Should You Worry?

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?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Sichuan Yahua Industrial Group Carry?

As you can see below, at the end of March 2024, Sichuan Yahua Industrial Group had CN¥1.90b of debt, up from CN¥880.2m a year ago. Click the image for more detail. However, it does have CN¥4.67b in cash offsetting this, leading to net cash of CN¥2.77b.

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

According to the last reported balance sheet, Sichuan Yahua Industrial Group had liabilities of CN¥3.11b due within 12 months, and liabilities of CN¥787.0m due beyond 12 months. On the other hand, it had cash of CN¥4.67b and CN¥2.31b worth of receivables due within a year. So it can boast CN¥3.08b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sichuan Yahua Industrial Group can strengthen its balance sheet over time. 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 28%, to CN¥11b. That makes us nervous, to say the least.

So How Risky Is Sichuan Yahua Industrial Group?

Although Sichuan Yahua Industrial Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥494m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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.