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

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.' 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, Yuanda China Holdings Limited (HKG:2789) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Yuanda China Holdings

What Is Yuanda China Holdings's Debt?

The image below, which you can click on for greater detail, shows that Yuanda China Holdings had debt of CN¥970.0m at the end of June 2022, a reduction from CN¥1.46b over a year. But it also has CN¥1.59b in cash to offset that, meaning it has CN¥620.1m net cash.

A Look At Yuanda China Holdings' Liabilities

The latest balance sheet data shows that Yuanda China Holdings had liabilities of CN¥4.70b due within a year, and liabilities of CN¥175.8m falling due after that. On the other hand, it had cash of CN¥1.59b and CN¥3.20b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

While this might seem like a lot, it is not so bad since Yuanda China Holdings has a market capitalization of CN¥169.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, 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.

Over 12 months, Yuanda China Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 6.5%. We would much prefer see growth.

So How Risky Is Yuanda China Holdings?

Although Yuanda China Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥12m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 2 warning signs for Yuanda China Holdings 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. 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.