Is Yuanda China Holdings (HKG:2789) A Risky Investment?

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. As with many other companies Yuanda China Holdings Limited (HKG:2789) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yuanda China Holdings

How Much Debt Does Yuanda China Holdings Carry?

As you can see below, Yuanda China Holdings had CN¥1.34b of debt at December 2020, down from CN¥1.78b a year prior. But it also has CN¥2.01b in cash to offset that, meaning it has CN¥675.7m net cash.

How Healthy Is Yuanda China Holdings' Balance Sheet?

According to the last reported balance sheet, Yuanda China Holdings had liabilities of CN¥5.69b due within 12 months, and liabilities of CN¥589.6m due beyond 12 months. On the other hand, it had cash of CN¥2.01b and CN¥4.42b worth of receivables due within a year. So it can boast CN¥161.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Yuanda China Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Yuanda China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yuanda China Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Yuanda China Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Yuanda China Holdings?

While Yuanda China Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Yuanda China Holdings has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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. 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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