Yili Chuanning BiotechnologyLtd (SZSE:301301) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Yili Chuanning Biotechnology Co.,Ltd. (SZSE:301301) does carry debt. But should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Yili Chuanning BiotechnologyLtd

How Much Debt Does Yili Chuanning BiotechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that Yili Chuanning BiotechnologyLtd had debt of CN¥1.41b at the end of September 2024, a reduction from CN¥2.11b over a year. On the flip side, it has CN¥624.8m in cash leading to net debt of about CN¥787.9m.

A Look At Yili Chuanning BiotechnologyLtd's Liabilities

According to the last reported balance sheet, Yili Chuanning BiotechnologyLtd had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥965.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥624.8m as well as receivables valued at CN¥2.18b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥152.9m.

Having regard to Yili Chuanning BiotechnologyLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥28.0b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Yili Chuanning BiotechnologyLtd's net debt is only 0.36 times its EBITDA. And its EBIT easily covers its interest expense, being 33.7 times the size. 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 68% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yili Chuanning BiotechnologyLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Yili Chuanning BiotechnologyLtd recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

The good news is that Yili Chuanning BiotechnologyLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. It looks Yili Chuanning BiotechnologyLtd has no trouble standing on its own two feet, and it has no reason to fear its lenders. For investing nerds like us its balance sheet is almost charming. Over time, share prices tend to follow earnings per share, so if you're interested in Yili Chuanning BiotechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.