Here's Why YNBY International (HKG:30) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, YNBY International Limited (HKG:30) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for YNBY International

How Much Debt Does YNBY International Carry?

As you can see below, at the end of September 2023, YNBY International had HK$38.1m of debt, up from HK$25.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$207.7m in cash, so it actually has HK$169.6m net cash.

How Strong Is YNBY International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YNBY International had liabilities of HK$208.7m due within 12 months and liabilities of HK$15.3m due beyond that. Offsetting these obligations, it had cash of HK$207.7m as well as receivables valued at HK$108.9m due within 12 months. So it actually has HK$92.6m more liquid assets than total liabilities.

This short term liquidity is a sign that YNBY International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that YNBY International has more cash than debt is arguably a good indication that it can manage its debt safely.

Although YNBY International made a loss at the EBIT level, last year, it was also good to see that it generated HK$144m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is YNBY International'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. YNBY International 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 year, YNBY International recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case YNBY International has HK$169.6m in net cash and a decent-looking balance sheet. So we are not troubled with YNBY International's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for YNBY International you should know about.

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.