Is YNBY International (HKG:30) Using Too Much Debt?

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. As with many other companies YNBY International Limited (HKG:30) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YNBY International

What Is YNBY International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 YNBY International had HK$30.7m of debt, an increase on HK$25.0m, over one year. But it also has HK$503.8m in cash to offset that, meaning it has HK$473.1m net cash.

How Healthy Is YNBY International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YNBY International had liabilities of HK$135.4m due within 12 months and liabilities of HK$11.7m due beyond that. On the other hand, it had cash of HK$503.8m and -HK$173.5m worth of receivables due within a year. So it can boast HK$183.2m more liquid assets than total liabilities.

This surplus suggests that YNBY International is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that YNBY International has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, YNBY International made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$19m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since YNBY International 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While YNBY International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, YNBY International actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case YNBY International has HK$473.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 303% of that EBIT to free cash flow, bringing in HK$56m. So is YNBY International's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - YNBY International has 2 warning signs we think you should be aware of.

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.