Yonyou Network TechnologyLtd (SHSE:600588) Is Carrying A Fair Bit Of Debt

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.' 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 note that Yonyou Network Technology Co.,Ltd. (SHSE:600588) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Yonyou Network TechnologyLtd

How Much Debt Does Yonyou Network TechnologyLtd Carry?

The chart below, which you can click on for greater detail, shows that Yonyou Network TechnologyLtd had CN¥6.15b in debt in June 2024; about the same as the year before. However, it does have CN¥5.25b in cash offsetting this, leading to net debt of about CN¥901.0m.

A Look At Yonyou Network TechnologyLtd's Liabilities

According to the last reported balance sheet, Yonyou Network TechnologyLtd had liabilities of CN¥10.0b due within 12 months, and liabilities of CN¥2.73b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.25b as well as receivables valued at CN¥4.04b due within 12 months. So it has liabilities totalling CN¥3.49b more than its cash and near-term receivables, combined.

Given Yonyou Network TechnologyLtd has a market capitalization of CN¥29.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Yonyou Network TechnologyLtd 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.

Over 12 months, Yonyou Network TechnologyLtd reported revenue of CN¥10b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Yonyou Network TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥861m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥2.2b of cash over the last year. So in short it's a really risky stock. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.