Yantai North Andre JuiceLtd (HKG:2218) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Yantai North Andre Juice Co.,Ltd. (HKG:2218) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yantai North Andre JuiceLtd

What Is Yantai North Andre JuiceLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Yantai North Andre JuiceLtd had debt of CN¥30.0m at the end of September 2023, a reduction from CN¥90.0m over a year. However, it does have CN¥1.02b in cash offsetting this, leading to net cash of CN¥989.2m.

How Healthy Is Yantai North Andre JuiceLtd's Balance Sheet?

The latest balance sheet data shows that Yantai North Andre JuiceLtd had liabilities of CN¥148.4m due within a year, and liabilities of CN¥9.05m falling due after that. On the other hand, it had cash of CN¥1.02b and CN¥121.3m worth of receivables due within a year. So it actually has CN¥983.1m more liquid assets than total liabilities.

It's good to see that Yantai North Andre JuiceLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Yantai North Andre JuiceLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Yantai North Andre JuiceLtd grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yantai North Andre JuiceLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Yantai North Andre JuiceLtd 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. During the last three years, Yantai North Andre JuiceLtd generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yantai North Andre JuiceLtd has net cash of CN¥989.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in CN¥111m. So we don't think Yantai North Andre JuiceLtd's use of debt is risky. 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 - Yantai North Andre JuiceLtd has 1 warning sign 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.