Is Yincheng Life Service (HKG:1922) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yincheng Life Service CO., Ltd. (HKG:1922) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Yincheng Life Service

What Is Yincheng Life Service's Net Debt?

The image below, which you can click on for greater detail, shows that Yincheng Life Service had debt of CN¥131.7m at the end of December 2022, a reduction from CN¥226.1m over a year. But it also has CN¥368.5m in cash to offset that, meaning it has CN¥236.8m net cash.

A Look At Yincheng Life Service's Liabilities

According to the last reported balance sheet, Yincheng Life Service had liabilities of CN¥855.3m due within 12 months, and liabilities of CN¥24.5m due beyond 12 months. On the other hand, it had cash of CN¥368.5m and CN¥543.0m worth of receivables due within a year. So it actually has CN¥31.7m more liquid assets than total liabilities.

This surplus suggests that Yincheng Life Service has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yincheng Life Service has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Yincheng Life Service grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yincheng Life Service will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yincheng Life Service 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 three years, Yincheng Life Service recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yincheng Life Service has net cash of CN¥236.8m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Yincheng Life Service's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Yincheng Life Service .

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.