We Think Yongxing Special Materials TechnologyLtd (SZSE:002756) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yongxing Special Materials TechnologyLtd

What Is Yongxing Special Materials TechnologyLtd's Net Debt?

As you can see below, at the end of September 2024, Yongxing Special Materials TechnologyLtd had CN¥255.0m of debt, up from CN¥230.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥8.58b in cash, leading to a CN¥8.33b net cash position.

How Strong 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¥1.05b due within 12 months and liabilities of CN¥133.2m due beyond that. On the other hand, it had cash of CN¥8.58b and CN¥807.8m worth of receivables due within a year. So it actually has CN¥8.21b more liquid assets than total liabilities.

This luscious liquidity implies that Yongxing Special Materials TechnologyLtd's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 80% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. During the last three years, Yongxing Special Materials TechnologyLtd generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yongxing Special Materials TechnologyLtd has CN¥8.33b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥612m, being 81% of its EBIT. So we don't think Yongxing Special Materials TechnologyLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yongxing Special Materials TechnologyLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.