Yunnan Baiyao GroupLtd (SZSE:000538) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Yunnan Baiyao Group Co.,Ltd (SZSE:000538) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yunnan Baiyao GroupLtd

What Is Yunnan Baiyao GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Yunnan Baiyao GroupLtd had debt of CN¥560.4m at the end of September 2024, a reduction from CN¥1.46b over a year. But it also has CN¥15.6b in cash to offset that, meaning it has CN¥15.0b net cash.

How Healthy Is Yunnan Baiyao GroupLtd's Balance Sheet?

The latest balance sheet data shows that Yunnan Baiyao GroupLtd had liabilities of CN¥13.9b due within a year, and liabilities of CN¥1.17b falling due after that. Offsetting this, it had CN¥15.6b in cash and CN¥13.1b in receivables that were due within 12 months. So it actually has CN¥13.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Yunnan Baiyao GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yunnan Baiyao GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Yunnan Baiyao GroupLtd's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yunnan Baiyao GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yunnan Baiyao GroupLtd 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 most recent three years, Yunnan Baiyao GroupLtd recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yunnan Baiyao GroupLtd has net cash of CN¥15.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥4.4b, being 67% of its EBIT. So we are not troubled with Yunnan Baiyao GroupLtd's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Yunnan Baiyao GroupLtd .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.