Does YuanShengTai Dairy Farm (HKG:1431) Have A Healthy Balance Sheet?

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 YuanShengTai Dairy Farm Limited (HKG:1431) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for YuanShengTai Dairy Farm

What Is YuanShengTai Dairy Farm's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 YuanShengTai Dairy Farm had debt of CN¥341.6m, up from none in one year. However, it does have CN¥893.5m in cash offsetting this, leading to net cash of CN¥551.9m.

How Healthy Is YuanShengTai Dairy Farm's Balance Sheet?

We can see from the most recent balance sheet that YuanShengTai Dairy Farm had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥747.6m due beyond that. Offsetting these obligations, it had cash of CN¥893.5m as well as receivables valued at CN¥75.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.05b.

Given this deficit is actually higher than the company's market capitalization of CN¥839.1m, we think shareholders really should watch YuanShengTai Dairy Farm's debt levels, like a parent watching their child ride a bike for the first time. 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. Given that YuanShengTai Dairy Farm has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also positive, YuanShengTai Dairy Farm grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is YuanShengTai Dairy Farm'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. YuanShengTai Dairy Farm 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. During the last three years, YuanShengTai Dairy Farm burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While YuanShengTai Dairy Farm does have more liabilities than liquid assets, it also has net cash of CN¥551.9m. And we liked the look of last year's 21% year-on-year EBIT growth. So although we see some areas for improvement, we're not too worried about YuanShengTai Dairy Farm's balance sheet. 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. Be aware that YuanShengTai Dairy Farm is showing 2 warning signs in our investment analysis , 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.