These 4 Measures Indicate That China YuHua Education (HKG:6169) Is Using Debt Extensively

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.' 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, China YuHua Education Corporation Limited (HKG:6169) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China YuHua Education's Net Debt?

As you can see below, China YuHua Education had CN¥510.0m of debt at February 2025, down from CN¥2.07b a year prior. However, its balance sheet shows it holds CN¥1.30b in cash, so it actually has CN¥786.8m net cash.

How Strong Is China YuHua Education's Balance Sheet?

We can see from the most recent balance sheet that China YuHua Education had liabilities of CN¥3.04b falling due within a year, and liabilities of CN¥895.5m due beyond that. On the other hand, it had cash of CN¥1.30b and CN¥217.0m worth of receivables due within a year. So its liabilities total CN¥2.43b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥2.07b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. China YuHua Education boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Check out our latest analysis for China YuHua Education

The good news is that China YuHua Education has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China YuHua Education's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China YuHua Education 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 three years, China YuHua Education saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although China YuHua Education's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥786.8m. And it also grew its EBIT by 4.1% over the last year. Despite the cash, we do find China YuHua Education's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. 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, we've discovered 4 warning signs for China YuHua Education (1 is a bit unpleasant!) that you should be aware of before investing here.

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.