Is Yeahka (HKG:9923) 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 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 can see that Yeahka Limited (HKG:9923) does use debt in its business. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Yeahka

How Much Debt Does Yeahka Carry?

You can click the graphic below for the historical numbers, but it shows that Yeahka had CN¥217.6m of debt in December 2020, down from CN¥1.55b, one year before. However, it does have CN¥2.64b in cash offsetting this, leading to net cash of CN¥2.42b.

How Healthy Is Yeahka's Balance Sheet?

We can see from the most recent balance sheet that Yeahka had liabilities of CN¥2.32b falling due within a year, and liabilities of CN¥132.0m due beyond that. Offsetting this, it had CN¥2.64b in cash and CN¥2.24b in receivables that were due within 12 months. So it actually has CN¥2.43b more liquid assets than total liabilities.

This short term liquidity is a sign that Yeahka could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Yeahka has more cash than debt is arguably a good indication that it can manage its debt safely.

While Yeahka doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yeahka can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yeahka 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, Yeahka recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Yeahka has CN¥2.42b in net cash and a decent-looking balance sheet. So we don't think Yeahka's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Yeahka has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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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