YCIH Green High-Performance Concrete (HKG:1847) Has A Rock Solid 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.' 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. As with many other companies YCIH Green High-Performance Concrete Company Limited (HKG:1847) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for YCIH Green High-Performance Concrete

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

As you can see below, at the end of December 2020, YCIH Green High-Performance Concrete had CN¥156.1m of debt, up from CN¥114.6m a year ago. Click the image for more detail. But it also has CN¥737.2m in cash to offset that, meaning it has CN¥581.0m net cash.

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

The latest balance sheet data shows that YCIH Green High-Performance Concrete had liabilities of CN¥3.18b due within a year, and liabilities of CN¥21.6m falling due after that. Offsetting these obligations, it had cash of CN¥737.2m as well as receivables valued at CN¥3.52b due within 12 months. So it can boast CN¥1.06b more liquid assets than total liabilities.

This excess liquidity is a great indication that YCIH Green High-Performance Concrete's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that YCIH Green High-Performance Concrete has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that YCIH Green High-Performance Concrete grew its EBIT by 18% last year, making its debt load easier to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that YCIH Green High-Performance Concrete has net cash of CN¥581.0m and plenty of liquid assets. And it impressed us with its EBIT growth of 18% over the last year. So we don't think YCIH Green High-Performance Concrete's use of debt is risky. 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 1 warning sign we think you should be aware of.

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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