Here's Why Beijing Yuanlong Yato Culture DisseminationLtd (SZSE:002878) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Beijing Yuanlong Yato Culture Dissemination Co.,Ltd. (SZSE:002878) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Beijing Yuanlong Yato Culture DisseminationLtd

How Much Debt Does Beijing Yuanlong Yato Culture DisseminationLtd Carry?

As you can see below, Beijing Yuanlong Yato Culture DisseminationLtd had CN¥359.9m of debt at September 2024, down from CN¥514.9m a year prior. On the flip side, it has CN¥334.7m in cash leading to net debt of about CN¥25.2m.

How Strong Is Beijing Yuanlong Yato Culture DisseminationLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Yuanlong Yato Culture DisseminationLtd had liabilities of CN¥741.8m due within 12 months and liabilities of CN¥31.0m due beyond that. Offsetting this, it had CN¥334.7m in cash and CN¥815.7m in receivables that were due within 12 months. So it actually has CN¥377.5m more liquid assets than total liabilities.

This surplus suggests that Beijing Yuanlong Yato Culture DisseminationLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, Beijing Yuanlong Yato Culture DisseminationLtd has virtually no net debt, so it's fair to say it does not have a heavy 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 Beijing Yuanlong Yato Culture DisseminationLtd 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 Beijing Yuanlong Yato Culture DisseminationLtd had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to CN¥2.5b. We would much prefer see growth.

Caveat Emptor

Importantly, Beijing Yuanlong Yato Culture DisseminationLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥2.1m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. And the cherry on top is that its actual free cash flow was CN¥34m with statutory profit coming in at CN¥5.1m. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Beijing Yuanlong Yato Culture DisseminationLtd (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.