Is YCIH Green High-Performance Concrete (HKG:1847) A Risky Investment?

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, YCIH Green High-Performance Concrete Company Limited (HKG:1847) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for YCIH Green High-Performance Concrete

What Is YCIH Green High-Performance Concrete's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 YCIH Green High-Performance Concrete had CN¥200.5m of debt, an increase on CN¥156.1m, over one year. But it also has CN¥451.0m in cash to offset that, meaning it has CN¥250.6m net cash.

How Strong Is YCIH Green High-Performance Concrete's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YCIH Green High-Performance Concrete had liabilities of CN¥3.38b due within 12 months and liabilities of CN¥32.3m due beyond that. Offsetting this, it had CN¥451.0m in cash and CN¥3.87b in receivables that were due within 12 months. So it can boast CN¥910.3m more liquid assets than total liabilities.

This surplus strongly suggests that YCIH Green High-Performance Concrete has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, YCIH Green High-Performance Concrete boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact YCIH Green High-Performance Concrete's saving grace is its low debt levels, because its EBIT has tanked 96% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is YCIH Green High-Performance Concrete'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. YCIH Green High-Performance Concrete 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. In the last three years, YCIH Green High-Performance Concrete created free cash flow amounting to 10% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case YCIH Green High-Performance Concrete has CN¥250.6m in net cash and a strong balance sheet. So we are not troubled with YCIH Green High-Performance Concrete's debt use. 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 YCIH Green High-Performance Concrete has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.