China Ruyi Holdings (HKG:136) Is Making Moderate Use Of Debt

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 China Ruyi Holdings Limited (HKG:136) makes use of 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Ruyi Holdings

How Much Debt Does China Ruyi Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2023 China Ruyi Holdings had debt of CN¥1.87b, up from CN¥1.59b in one year. However, it does have CN¥1.02b in cash offsetting this, leading to net debt of about CN¥844.2m.

A Look At China Ruyi Holdings' Liabilities

According to the last reported balance sheet, China Ruyi Holdings had liabilities of CN¥3.07b due within 12 months, and liabilities of CN¥2.26b due beyond 12 months. On the other hand, it had cash of CN¥1.02b and CN¥2.03b worth of receivables due within a year. So its liabilities total CN¥2.28b more than the combination of its cash and short-term receivables.

Since publicly traded China Ruyi Holdings shares are worth a total of CN¥21.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Ruyi Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, China Ruyi Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 6.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months China Ruyi Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥900m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥493m and the profit of CN¥380m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for China Ruyi Holdings 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.