Here's Why Yonyou Network TechnologyLtd (SHSE:600588) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Yonyou Network Technology Co.,Ltd. (SHSE:600588) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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?

As you can see below, at the end of September 2024, Yonyou Network TechnologyLtd had CN¥6.74b of debt, up from CN¥6.47b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥4.82b, its net debt is less, at about CN¥1.93b.

A Look At Yonyou Network TechnologyLtd's Liabilities

The latest balance sheet data shows that Yonyou Network TechnologyLtd had liabilities of CN¥10.8b due within a year, and liabilities of CN¥2.34b falling due after that. Offsetting these obligations, it had cash of CN¥4.82b as well as receivables valued at CN¥4.20b due within 12 months. So its liabilities total CN¥4.17b more than the combination of its cash and short-term receivables.

Since publicly traded Yonyou Network TechnologyLtd shares are worth a total of CN¥34.5b, 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. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to CN¥9.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Yonyou Network TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥1.3b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥2.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Yonyou Network TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.