Does Shiyue Daotian Group (HKG:9676) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Shiyue Daotian Group Co., Ltd. (HKG:9676) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does Shiyue Daotian Group Carry?

As you can see below, Shiyue Daotian Group had CN¥645.5m of debt at December 2024, down from CN¥1.01b a year prior. However, it does have CN¥726.6m in cash offsetting this, leading to net cash of CN¥81.1m.

How Strong Is Shiyue Daotian Group's Balance Sheet?

We can see from the most recent balance sheet that Shiyue Daotian Group had liabilities of CN¥980.3m falling due within a year, and liabilities of CN¥78.7m due beyond that. On the other hand, it had cash of CN¥726.6m and CN¥477.5m worth of receivables due within a year. So it can boast CN¥145.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Shiyue Daotian Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shiyue Daotian Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Shiyue Daotian Group

Better yet, Shiyue Daotian Group grew its EBIT by 125% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shiyue Daotian Group will need earnings to service that debt. 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 Shiyue Daotian Group 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. Looking at the most recent two years, Shiyue Daotian Group recorded free cash flow of 37% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shiyue Daotian Group has CN¥81.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 125% over the last year. So is Shiyue Daotian Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shiyue Daotian Group .

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.