Here's Why Guangdong Yussen Energy Technology (SZSE:002986) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Guangdong Yussen Energy Technology Co., Ltd. (SZSE:002986) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangdong Yussen Energy Technology

What Is Guangdong Yussen Energy Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Yussen Energy Technology had CN¥1.28b of debt, an increase on CN¥625.5m, over one year. However, it does have CN¥1.28b in cash offsetting this, leading to net debt of about CN¥55.9k.

How Healthy Is Guangdong Yussen Energy Technology's Balance Sheet?

The latest balance sheet data shows that Guangdong Yussen Energy Technology had liabilities of CN¥1.71b due within a year, and liabilities of CN¥1.22b falling due after that. Offsetting these obligations, it had cash of CN¥1.28b as well as receivables valued at CN¥465.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.19b.

Guangdong Yussen Energy Technology has a market capitalization of CN¥5.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, Guangdong Yussen Energy Technology has a very light debt load indeed.

But the other side of the story is that Guangdong Yussen Energy Technology saw its EBIT decline by 4.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Guangdong Yussen Energy Technology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Guangdong Yussen Energy Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Guangdong Yussen Energy Technology's conversion of EBIT to free cash flow has us nervous. For example, its interest cover and net debt to EBITDA give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that Guangdong Yussen Energy Technology is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Guangdong Yussen Energy Technology has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.