We Think Yue Yuen Industrial (Holdings) (HKG:551) Can Manage Its Debt With Ease

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.' 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. We can see that Yue Yuen Industrial (Holdings) Limited (HKG:551) does use debt in its business. But is this debt a concern to shareholders?

We've discovered 1 warning sign about Yue Yuen Industrial (Holdings). View them for free.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Yue Yuen Industrial (Holdings)'s Debt?

As you can see below, Yue Yuen Industrial (Holdings) had US$757.3m of debt at December 2024, down from US$972.7m a year prior. But it also has US$797.6m in cash to offset that, meaning it has US$40.3m net cash.

How Strong Is Yue Yuen Industrial (Holdings)'s Balance Sheet?

According to the last reported balance sheet, Yue Yuen Industrial (Holdings) had liabilities of US$1.77b due within 12 months, and liabilities of US$691.2m due beyond 12 months. Offsetting this, it had US$797.6m in cash and US$1.35b in receivables that were due within 12 months. So its liabilities total US$317.2m more than the combination of its cash and short-term receivables.

Of course, Yue Yuen Industrial (Holdings) has a market capitalization of US$2.49b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Yue Yuen Industrial (Holdings) also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Yue Yuen Industrial (Holdings)

In addition to that, we're happy to report that Yue Yuen Industrial (Holdings) has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yue Yuen Industrial (Holdings)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yue Yuen Industrial (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. Over the last three years, Yue Yuen Industrial (Holdings) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Yue Yuen Industrial (Holdings) does have more liabilities than liquid assets, it also has net cash of US$40.3m. And it impressed us with free cash flow of US$331m, being 183% of its EBIT. So is Yue Yuen Industrial (Holdings)'s debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Yue Yuen Industrial (Holdings) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.