Is Zhejiang Yongan Rongtong Holdings (HKG:8211) Using Debt In A Risky Way?

Warren Buffett famously said, '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 Zhejiang Yongan Rongtong Holdings Co., Ltd. (HKG:8211) does use debt in its business. 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. 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. 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.

See our latest analysis for Zhejiang Yongan Rongtong Holdings

What Is Zhejiang Yongan Rongtong Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Zhejiang Yongan Rongtong Holdings had CN¥33.7m of debt, an increase on CN¥18.3m, over one year. However, its balance sheet shows it holds CN¥55.9m in cash, so it actually has CN¥22.2m net cash.

How Strong Is Zhejiang Yongan Rongtong Holdings' Balance Sheet?

According to the last reported balance sheet, Zhejiang Yongan Rongtong Holdings had liabilities of CN¥43.3m due within 12 months, and liabilities of CN¥29.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥55.9m as well as receivables valued at CN¥26.0m due within 12 months. So it can boast CN¥9.03m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Yongan Rongtong Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Zhejiang Yongan Rongtong Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥79m, which is a fall of 20%. That's not what we would hope to see.

So How Risky Is Zhejiang Yongan Rongtong Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Zhejiang Yongan Rongtong Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥2.7m and booked a CN¥36m accounting loss. But at least it has CN¥22.2m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Zhejiang Yongan Rongtong Holdings 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.

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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.