Is Yongxing Special Materials TechnologyLtd (SZSE:002756) A Risky Investment?

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.' 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. Importantly, Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 March 2024, Yongxing Special Materials TechnologyLtd had CN¥853.4m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥10.2b in cash, leading to a CN¥9.37b net cash position.

A Look At Yongxing Special Materials TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Yongxing Special Materials TechnologyLtd had liabilities of CN¥2.26b due within 12 months and liabilities of CN¥127.7m due beyond that. Offsetting these obligations, it had cash of CN¥10.2b as well as receivables valued at CN¥1.17b due within 12 months. So it can boast CN¥9.00b more liquid assets than total liabilities.

This surplus liquidity suggests that Yongxing Special Materials TechnologyLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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.

It is just as well that Yongxing Special Materials TechnologyLtd's load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yongxing Special Materials TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Yongxing Special Materials TechnologyLtd recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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¥9.37b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 83% of its EBIT. So we don't think Yongxing Special Materials TechnologyLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Yongxing Special Materials TechnologyLtd (of which 2 are significant!) you should know about.

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.