Yangzhou Yangjie Electronic Technology (SZSE:300373) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Yangzhou Yangjie Electronic Technology Co., Ltd. (SZSE:300373) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yangzhou Yangjie Electronic Technology

What Is Yangzhou Yangjie Electronic Technology's Debt?

As you can see below, at the end of March 2024, Yangzhou Yangjie Electronic Technology had CN¥1.66b of debt, up from CN¥1.20b a year ago. Click the image for more detail. However, it does have CN¥3.78b in cash offsetting this, leading to net cash of CN¥2.12b.

How Healthy Is Yangzhou Yangjie Electronic Technology's Balance Sheet?

According to the last reported balance sheet, Yangzhou Yangjie Electronic Technology had liabilities of CN¥3.07b due within 12 months, and liabilities of CN¥1.24b due beyond 12 months. Offsetting this, it had CN¥3.78b in cash and CN¥1.83b in receivables that were due within 12 months. So it actually has CN¥1.31b more liquid assets than total liabilities.

This surplus suggests that Yangzhou Yangjie Electronic Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yangzhou Yangjie Electronic Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Yangzhou Yangjie Electronic Technology if management cannot prevent a repeat of the 34% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yangzhou Yangjie Electronic Technology'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. While Yangzhou Yangjie Electronic Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Yangzhou Yangjie Electronic Technology reported free cash flow worth 3.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yangzhou Yangjie Electronic Technology has net cash of CN¥2.12b, as well as more liquid assets than liabilities. So we don't have any problem with Yangzhou Yangjie Electronic Technology's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Yangzhou Yangjie Electronic Technology .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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