Zhejiang Yongan Rongtong Holdings (HKG:8211) Has Debt But No Earnings; Should You Worry?

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.' 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhejiang Yongan Rongtong Holdings

How Much Debt Does Zhejiang Yongan Rongtong Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Yongan Rongtong Holdings had CN¥17.2m of debt in June 2021, down from CN¥31.0m, one year before. But on the other hand it also has CN¥26.8m in cash, leading to a CN¥9.57m net cash position.

How Healthy Is Zhejiang Yongan Rongtong Holdings' Balance Sheet?

According to the last reported balance sheet, Zhejiang Yongan Rongtong Holdings had liabilities of CN¥33.3m due within 12 months, and liabilities of CN¥29.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥26.8m as well as receivables valued at CN¥40.9m due within 12 months. So it can boast CN¥5.17m more liquid assets than total liabilities.

This surplus suggests that Zhejiang Yongan Rongtong Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang Yongan Rongtong Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang Yongan Rongtong 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.

In the last year Zhejiang Yongan Rongtong Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to CN¥98m. That's not what we would hope to see.

So How Risky Is Zhejiang Yongan Rongtong Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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. And over the same period it saw negative free cash outflow of CN¥1.2m and booked a CN¥25m accounting loss. But at least it has CN¥9.57m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Zhejiang Yongan Rongtong Holdings has 3 warning signs (and 2 which are significant) we think 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.
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