Yangzhou Yangjie Electronic Technology (SZSE:300373) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Yangzhou Yangjie Electronic Technology Co., Ltd. (SZSE:300373) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yangzhou Yangjie Electronic Technology

What Is Yangzhou Yangjie Electronic Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Yangzhou Yangjie Electronic Technology had debt of CN¥1.40b, up from CN¥683.3m in one year. But on the other hand it also has CN¥3.25b in cash, leading to a CN¥1.85b net cash position.

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

The latest balance sheet data shows that Yangzhou Yangjie Electronic Technology had liabilities of CN¥2.68b due within a year, and liabilities of CN¥1.34b falling due after that. Offsetting this, it had CN¥3.25b in cash and CN¥2.07b in receivables that were due within 12 months. So it can boast 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. Succinctly put, Yangzhou Yangjie Electronic Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Yangzhou Yangjie Electronic Technology's load is not too heavy, because its EBIT was down 42% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Considering the last three years, Yangzhou Yangjie Electronic Technology actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yangzhou Yangjie Electronic Technology has CN¥1.85b in net cash and a decent-looking balance sheet. So while Yangzhou Yangjie Electronic Technology does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Yangzhou Yangjie Electronic Technology that you should be aware of before investing here.

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.