Does Zhejiang Yongan Rongtong Holdings (HKG:8211) Have A 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhejiang Yongan Rongtong Holdings Co., Ltd. (HKG:8211) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Zhejiang Yongan Rongtong Holdings

What Is Zhejiang Yongan Rongtong Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Zhejiang Yongan Rongtong Holdings had CN¥19.3m of debt, an increase on CN¥17.2m, over one year. But on the other hand it also has CN¥44.5m in cash, leading to a CN¥25.1m net cash position.

How Strong Is Zhejiang Yongan Rongtong Holdings' Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Yongan Rongtong Holdings had liabilities of CN¥20.2m falling due within a year, and liabilities of CN¥28.7m due beyond that. On the other hand, it had cash of CN¥44.5m and CN¥26.7m worth of receivables due within a year. So it actually has CN¥22.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Zhejiang Yongan Rongtong Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Zhejiang Yongan Rongtong Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhejiang Yongan Rongtong Holdings will need earnings to service that debt. 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.

In the last year Zhejiang Yongan Rongtong Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥81m. That's not what we would hope to see.

So How Risky Is Zhejiang Yongan Rongtong Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhejiang Yongan Rongtong Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.7m of cash and made a loss of CN¥13m. But at least it has CN¥25.1m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Zhejiang Yongan Rongtong Holdings (2 don't sit too well with us!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.