Is YTO Express GroupLtd (SHSE:600233) Using Too Much 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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for YTO Express GroupLtd

How Much Debt Does YTO Express GroupLtd Carry?

As you can see below, YTO Express GroupLtd had CN¥4.58b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥9.14b in cash to offset that, meaning it has CN¥4.56b net cash.

A Look At YTO Express GroupLtd's Liabilities

We can see from the most recent balance sheet that YTO Express GroupLtd had liabilities of CN¥11.7b falling due within a year, and liabilities of CN¥1.84b due beyond that. On the other hand, it had cash of CN¥9.14b and CN¥2.15b worth of receivables due within a year. So its liabilities total CN¥2.24b more than the combination of its cash and short-term receivables.

Since publicly traded YTO Express GroupLtd shares are worth a total of CN¥59.7b, it seems unlikely that this level of liabilities would be a major 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 6.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if YTO Express GroupLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While YTO Express GroupLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, YTO Express GroupLtd recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about YTO Express GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.56b. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for YTO Express GroupLtd you should be aware of.

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.