Is YTO Express GroupLtd (SHSE:600233) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that YTO Express Group Co.,Ltd. (SHSE:600233) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for YTO Express GroupLtd

What Is YTO Express GroupLtd's Debt?

As you can see below, YTO Express GroupLtd had CN¥4.65b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥7.88b in cash to offset that, meaning it has CN¥3.23b net cash.

How Strong Is YTO Express GroupLtd's Balance Sheet?

According to the last reported balance sheet, YTO Express GroupLtd had liabilities of CN¥11.2b due within 12 months, and liabilities of CN¥1.68b due beyond 12 months. Offsetting this, it had CN¥7.88b in cash and CN¥1.94b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.08b more than its cash and near-term receivables, combined.

Given YTO Express GroupLtd has a market capitalization of CN¥49.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, YTO Express GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, YTO Express GroupLtd saw its EBIT drop by 7.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 YTO Express GroupLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. YTO Express GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, YTO Express GroupLtd's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that YTO Express GroupLtd has CN¥3.23b in net cash. So we don't have any problem with YTO Express GroupLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for YTO Express GroupLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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