Here's Why Suzhou YourBest New-type MaterialsLtd (SZSE:301266) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Suzhou YourBest New-type Materials Co.,Ltd. (SZSE:301266) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Suzhou YourBest New-type MaterialsLtd

How Much Debt Does Suzhou YourBest New-type MaterialsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Suzhou YourBest New-type MaterialsLtd had CN¥934.8m of debt in September 2024, down from CN¥1.03b, one year before. On the flip side, it has CN¥832.4m in cash leading to net debt of about CN¥102.4m.

How Strong Is Suzhou YourBest New-type MaterialsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Suzhou YourBest New-type MaterialsLtd had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥418.7m due beyond that. Offsetting these obligations, it had cash of CN¥832.4m as well as receivables valued at CN¥1.77b due within 12 months. So it actually has CN¥962.5m more liquid assets than total liabilities.

It's good to see that Suzhou YourBest New-type MaterialsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Suzhou YourBest New-type MaterialsLtd's low debt to EBITDA ratio of 0.79 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 4.4 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Shareholders should be aware that Suzhou YourBest New-type MaterialsLtd's EBIT was down 42% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Suzhou YourBest New-type MaterialsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Suzhou YourBest New-type MaterialsLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Suzhou YourBest New-type MaterialsLtd's EBIT growth rate and its conversion of EBIT to free cash flow were discouraging. But on the brighter side of life, its net debt to EBITDA leaves us feeling more frolicsome. Taking the abovementioned factors together we do think Suzhou YourBest New-type MaterialsLtd's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Suzhou YourBest New-type MaterialsLtd (2 are a bit unpleasant!) 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.