Is Yuanda China Holdings (HKG:2789) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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 Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Yuanda China Holdings

How Much Debt Does Yuanda China Holdings Carry?

The image below, which you can click on for greater detail, shows that Yuanda China Holdings had debt of CN¥1.21b at the end of June 2021, a reduction from CN¥1.55b over a year. However, it does have CN¥2.16b in cash offsetting this, leading to net cash of CN¥951.8m.

How Strong Is Yuanda China Holdings' Balance Sheet?

The latest balance sheet data shows that Yuanda China Holdings had liabilities of CN¥4.97b due within a year, and liabilities of CN¥589.0m falling due after that. Offsetting these obligations, it had cash of CN¥2.16b as well as receivables valued at CN¥4.28b due within 12 months. So it actually has CN¥880.8m more liquid assets than total liabilities.

This luscious liquidity implies that Yuanda China Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 you can't view debt in total isolation; since Yuanda China Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Yuanda China Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to CN¥3.1b. We would much prefer see growth.

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. There's no doubt the next few years will be crucial to how the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Yuanda China Holdings (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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