Does Yongxing Special Materials TechnologyLtd (SZSE:002756) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yongxing Special Materials TechnologyLtd

How Much Debt Does Yongxing Special Materials TechnologyLtd Carry?

As you can see below, at the end of June 2024, Yongxing Special Materials TechnologyLtd had CN¥635.2m of debt, up from CN¥237.3m a year ago. Click the image for more detail. However, it does have CN¥9.35b in cash offsetting this, leading to net cash of CN¥8.72b.

How Healthy Is Yongxing Special Materials TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yongxing Special Materials TechnologyLtd had liabilities of CN¥1.96b due within 12 months and liabilities of CN¥138.8m due beyond that. Offsetting this, it had CN¥9.35b in cash and CN¥730.5m in receivables that were due within 12 months. So it actually has CN¥7.98b more liquid assets than total liabilities.

This surplus strongly suggests that Yongxing Special Materials TechnologyLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Yongxing Special Materials TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Yongxing Special Materials TechnologyLtd if management cannot prevent a repeat of the 69% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yongxing Special Materials TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yongxing Special Materials TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Yongxing Special Materials TechnologyLtd recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yongxing Special Materials TechnologyLtd has net cash of CN¥8.72b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.9b, being 85% of its EBIT. So is Yongxing Special Materials TechnologyLtd's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for Yongxing Special Materials TechnologyLtd (1 doesn't sit too well with us) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.