Yee Hop Holdings (HKG:1662) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Yee Hop Holdings Limited (HKG:1662) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yee Hop Holdings

What Is Yee Hop Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Yee Hop Holdings had HK$152.3m of debt in September 2021, down from HK$200.4m, one year before. But on the other hand it also has HK$250.0m in cash, leading to a HK$97.7m net cash position.

A Look At Yee Hop Holdings' Liabilities

According to the last reported balance sheet, Yee Hop Holdings had liabilities of HK$336.2m due within 12 months, and liabilities of HK$212.3m due beyond 12 months. On the other hand, it had cash of HK$250.0m and HK$297.4m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Yee Hop Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$620.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Yee Hop Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Yee Hop Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$9.6m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Yee Hop Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yee Hop 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, Yee Hop Holdings actually produced more free cash flow than EBIT over the last year. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Yee Hop Holdings has HK$97.7m in net cash. And it impressed us with free cash flow of HK$95m, being 996% of its EBIT. So we don't have any problem with Yee Hop Holdings'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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Yee Hop Holdings (of which 1 is concerning!) you should know about.

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.