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

Warren Buffett famously said, '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. We note that Yangzhou Yangjie Electronic Technology Co., Ltd. (SZSE:300373) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yangzhou Yangjie Electronic Technology

What Is Yangzhou Yangjie Electronic Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yangzhou Yangjie Electronic Technology had CN¥2.07b of debt, an increase on CN¥1.40b, over one year. But it also has CN¥4.08b in cash to offset that, meaning it has CN¥2.01b net cash.

A Look At Yangzhou Yangjie Electronic Technology's Liabilities

We can see from the most recent balance sheet that Yangzhou Yangjie Electronic Technology had liabilities of CN¥3.55b falling due within a year, and liabilities of CN¥1.29b due beyond that. On the other hand, it had cash of CN¥4.08b and CN¥2.02b worth of receivables due within a year. So it actually has CN¥1.25b more liquid assets than total liabilities.

This short term liquidity is a sign that Yangzhou Yangjie Electronic Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Also good is that Yangzhou Yangjie Electronic Technology grew its EBIT at 17% over the last year, further increasing its ability to manage 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 Yangzhou Yangjie Electronic Technology can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Yangzhou Yangjie Electronic Technology 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. Looking at the most recent three years, Yangzhou Yangjie Electronic Technology recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥2.01b, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think Yangzhou Yangjie Electronic Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Yangzhou Yangjie Electronic Technology that you should be aware of.

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.