Health Check: How Prudently Does Yashili International Holdings (HKG:1230) Use Debt?

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.' 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 Yashili International Holdings Ltd (HKG:1230) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Yashili International Holdings

What Is Yashili International Holdings's Debt?

As you can see below, at the end of December 2020, Yashili International Holdings had CN¥365.9m of debt, up from CN¥26.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.20b in cash, so it actually has CN¥1.84b net cash.

How Strong Is Yashili International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yashili International Holdings had liabilities of CN¥2.03b due within 12 months and liabilities of CN¥40.0m due beyond that. Offsetting this, it had CN¥2.20b in cash and CN¥91.2m in receivables that were due within 12 months. So it can boast CN¥225.0m more liquid assets than total liabilities.

This surplus suggests that Yashili International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yashili International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Yashili International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Yashili International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to CN¥3.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Yashili International Holdings?

While Yashili International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥101m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yashili International Holdings is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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