Does Yincheng Life Service (HKG:1922) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Yincheng Life Service CO., Ltd. (HKG:1922) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yincheng Life Service

What Is Yincheng Life Service's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Yincheng Life Service had CN¥280.0m of debt, an increase on CN¥165.0m, over one year. However, its balance sheet shows it holds CN¥572.0m in cash, so it actually has CN¥292.0m net cash.

How Strong Is Yincheng Life Service's Balance Sheet?

The latest balance sheet data shows that Yincheng Life Service had liabilities of CN¥761.0m due within a year, and liabilities of CN¥24.5m falling due after that. Offsetting these obligations, it had cash of CN¥572.0m as well as receivables valued at CN¥241.1m due within 12 months. So it actually has CN¥27.6m more liquid assets than total liabilities.

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

On top of that, Yincheng Life Service grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yincheng Life Service's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yincheng Life Service 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. Over the most recent three years, Yincheng Life Service recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥292.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 84% year-on-year EBIT growth. So we don't think Yincheng Life Service's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Yincheng Life Service you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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