Hebei Yichen Industrial Group (HKG:1596) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Hebei Yichen Industrial Group Corporation Limited (HKG:1596) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hebei Yichen Industrial Group

How Much Debt Does Hebei Yichen Industrial Group Carry?

As you can see below, Hebei Yichen Industrial Group had CN¥209.7m of debt at December 2020, down from CN¥250.0m a year prior. However, it does have CN¥329.4m in cash offsetting this, leading to net cash of CN¥119.7m.

A Look At Hebei Yichen Industrial Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Hebei Yichen Industrial Group had liabilities of CN¥753.3m due within 12 months and liabilities of CN¥32.1m due beyond that. On the other hand, it had cash of CN¥329.4m and CN¥1.02b worth of receivables due within a year. So it can boast CN¥562.3m more liquid assets than total liabilities.

This surplus suggests that Hebei Yichen Industrial Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hebei Yichen Industrial Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Hebei Yichen Industrial Group grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hebei Yichen Industrial Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hebei Yichen Industrial Group 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. In the last three years, Hebei Yichen Industrial Group's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Hebei Yichen Industrial Group has CN¥119.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 22% over the last year. So we don't think Hebei Yichen Industrial Group's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Hebei Yichen Industrial Group 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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