Does Yeebo (International Holdings) (HKG:259) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Yeebo (International Holdings) Limited (HKG:259) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Yeebo (International Holdings)

What Is Yeebo (International Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Yeebo (International Holdings) had HK$100.0m of debt, an increase on HK$4.26m, over one year. However, it does have HK$138.3m in cash offsetting this, leading to net cash of HK$38.3m.

How Healthy Is Yeebo (International Holdings)'s Balance Sheet?

According to the last reported balance sheet, Yeebo (International Holdings) had liabilities of HK$507.3m due within 12 months, and liabilities of HK$51.9m due beyond 12 months. Offsetting this, it had HK$138.3m in cash and HK$272.6m in receivables that were due within 12 months. So it has liabilities totalling HK$148.4m more than its cash and near-term receivables, combined.

Given Yeebo (International Holdings) has a market capitalization of HK$1.71b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Yeebo (International Holdings) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Yeebo (International Holdings)'s load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yeebo (International Holdings)'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yeebo (International Holdings) 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. Over the last three years, Yeebo (International Holdings) recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Yeebo (International Holdings) has HK$38.3m in net cash. And it impressed us with free cash flow of -HK$89m, being 94% of its EBIT. So we don't have any problem with Yeebo (International Holdings)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Yeebo (International Holdings) has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.