Health Check: How Prudently Does Zhejiang Yongan Rongtong Holdings (HKG:8211) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zhejiang Yongan Rongtong Holdings Co., Ltd. (HKG:8211) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang Yongan Rongtong Holdings

What Is Zhejiang Yongan Rongtong Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Zhejiang Yongan Rongtong Holdings had debt of CN¥34.9m, up from CN¥19.3m in one year. But it also has CN¥53.8m in cash to offset that, meaning it has CN¥18.9m net cash.

How Healthy Is Zhejiang Yongan Rongtong Holdings' Balance Sheet?

The latest balance sheet data shows that Zhejiang Yongan Rongtong Holdings had liabilities of CN¥40.4m due within a year, and liabilities of CN¥30.8m falling due after that. Offsetting these obligations, it had cash of CN¥53.8m as well as receivables valued at CN¥13.0m due within 12 months. So it has liabilities totalling CN¥4.32m more than its cash and near-term receivables, combined.

Of course, Zhejiang Yongan Rongtong Holdings has a market capitalization of CN¥49.7m, 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. Despite its noteworthy liabilities, Zhejiang Yongan Rongtong 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 Zhejiang Yongan Rongtong 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.

In the last year Zhejiang Yongan Rongtong Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥69m. We would much prefer see growth.

So How Risky Is Zhejiang Yongan Rongtong Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Zhejiang Yongan Rongtong Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥447k and booked a CN¥38m accounting loss. However, it has net cash of CN¥18.9m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Zhejiang Yongan Rongtong Holdings has 3 warning signs we think you should be aware of.

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.