We Think Yili Chuanning BiotechnologyLtd (SZSE:301301) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Yili Chuanning Biotechnology Co.,Ltd. (SZSE:301301) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Yili Chuanning BiotechnologyLtd

What Is Yili Chuanning BiotechnologyLtd's Net Debt?

As you can see below, Yili Chuanning BiotechnologyLtd had CN¥1.72b of debt at March 2024, down from CN¥2.76b a year prior. However, it also had CN¥889.7m in cash, and so its net debt is CN¥827.0m.

How Strong Is Yili Chuanning BiotechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Yili Chuanning BiotechnologyLtd had liabilities of CN¥2.48b falling due within a year, and liabilities of CN¥760.5m due beyond that. Offsetting this, it had CN¥889.7m in cash and CN¥1.94b in receivables that were due within 12 months. So it has liabilities totalling CN¥414.6m more than its cash and near-term receivables, combined.

Having regard to Yili Chuanning BiotechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥29.5b company is short on cash, but still worth keeping an eye on the balance sheet.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Yili Chuanning BiotechnologyLtd's net debt is only 0.43 times its EBITDA. And its EBIT covers its interest expense a whopping 21.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Yili Chuanning BiotechnologyLtd grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Yili Chuanning BiotechnologyLtd 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Yili Chuanning BiotechnologyLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Yili Chuanning BiotechnologyLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. We think Yili Chuanning BiotechnologyLtd is no more beholden to its lenders, than the birds are to birdwatchers. For investing nerds like us its balance sheet is almost charming. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Yili Chuanning BiotechnologyLtd is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.