Is Yadea Group Holdings (HKG:1585) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Yadea Group Holdings Ltd. (HKG:1585) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yadea Group Holdings

What Is Yadea Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Yadea Group Holdings had CN¥832.5m of debt in December 2023, down from CN¥1.78b, one year before. However, it does have CN¥11.5b in cash offsetting this, leading to net cash of CN¥10.7b.

How Healthy Is Yadea Group Holdings' Balance Sheet?

According to the last reported balance sheet, Yadea Group Holdings had liabilities of CN¥16.4b due within 12 months, and liabilities of CN¥862.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.5b as well as receivables valued at CN¥970.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.76b.

Given Yadea Group Holdings has a market capitalization of CN¥34.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Yadea Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Yadea Group Holdings has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. 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 Yadea Group Holdings 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. Yadea Group Holdings 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. Happily for any shareholders, Yadea Group Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Yadea Group Holdings does have more liabilities than liquid assets, it also has net cash of CN¥10.7b. And it impressed us with free cash flow of CN¥2.2b, being 109% of its EBIT. So we don't think Yadea Group Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Yadea Group Holdings 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.

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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.

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