Health Check: How Prudently Does Yonyou Network TechnologyLtd (SHSE:600588) Use Debt?

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.' 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, Yonyou Network Technology Co.,Ltd. (SHSE:600588) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yonyou Network TechnologyLtd

How Much Debt Does Yonyou Network TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Yonyou Network TechnologyLtd had debt of CN¥6.47b, up from CN¥4.55b in one year. However, it does have CN¥7.60b in cash offsetting this, leading to net cash of CN¥1.14b.

A Look At Yonyou Network TechnologyLtd's Liabilities

The latest balance sheet data shows that Yonyou Network TechnologyLtd had liabilities of CN¥9.72b due within a year, and liabilities of CN¥2.74b falling due after that. Offsetting this, it had CN¥7.60b in cash and CN¥3.61b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.26b more than its cash and near-term receivables, combined.

Since publicly traded Yonyou Network TechnologyLtd shares are worth a total of CN¥46.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yonyou Network TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Yonyou Network TechnologyLtd'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.

In the last year Yonyou Network TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥9.4b. That's not what we would hope to see.

So How Risky Is Yonyou Network TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Yonyou Network TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.0b of cash and made a loss of CN¥272m. With only CN¥1.14b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Yonyou Network TechnologyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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

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.