Is Yangtze Optical Fibre And Cable Limited (HKG:6869) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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.

Check out our latest analysis for Yangtze Optical Fibre And Cable Limited

What Is Yangtze Optical Fibre And Cable Limited's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Yangtze Optical Fibre And Cable Limited had debt of CN¥3.75b, up from CN¥1.95b in one year. But on the other hand it also has CN¥3.96b in cash, leading to a CN¥218.0m net cash position.

How Strong Is Yangtze Optical Fibre And Cable Limited's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yangtze Optical Fibre And Cable Limited had liabilities of CN¥5.90b due within 12 months and liabilities of CN¥3.04b due beyond that. On the other hand, it had cash of CN¥3.96b and CN¥5.39b worth of receivables due within a year. So it actually has CN¥417.6m more liquid assets than total liabilities.

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

It is just as well that Yangtze Optical Fibre And Cable Limited's load is not too heavy, because its EBIT was down 37% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yangtze Optical Fibre And Cable Limited 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yangtze Optical Fibre And Cable Limited 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. During the last three years, Yangtze Optical Fibre And Cable Limited burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Yangtze Optical Fibre And Cable Limited has CN¥218.0m in net cash and a decent-looking balance sheet. So while Yangtze Optical Fibre And Cable Limited does not have a great balance sheet, it's certainly not too bad. 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 2 warning signs we've spotted with Yangtze Optical Fibre And Cable Limited .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.