We Think Yangtze Optical Fibre And Cable Limited (HKG:6869) Is Taking Some Risk With Its Debt

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 note that Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Yangtze Optical Fibre And Cable Limited Carry?

As you can see below, at the end of March 2025, Yangtze Optical Fibre And Cable Limited had CN¥9.62b of debt, up from CN¥8.80b a year ago. Click the image for more detail. However, it does have CN¥4.54b in cash offsetting this, leading to net debt of about CN¥5.08b.

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

According to the last reported balance sheet, Yangtze Optical Fibre And Cable Limited had liabilities of CN¥11.1b due within 12 months, and liabilities of CN¥5.52b due beyond 12 months. Offsetting this, it had CN¥4.54b in cash and CN¥6.33b in receivables that were due within 12 months. So its liabilities total CN¥5.73b more than the combination of its cash and short-term receivables.

Yangtze Optical Fibre And Cable Limited has a market capitalization of CN¥18.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

See our latest analysis for Yangtze Optical Fibre And Cable Limited

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Yangtze Optical Fibre And Cable Limited has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 5.0 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Importantly, Yangtze Optical Fibre And Cable Limited grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yangtze Optical Fibre And Cable Limited's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Considering the last three years, Yangtze Optical Fibre And Cable Limited actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Yangtze Optical Fibre And Cable Limited's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But its EBIT growth rate tells a very different story, and suggests some resilience. We think that Yangtze Optical Fibre And Cable Limited's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. We've identified 1 warning sign with Yangtze Optical Fibre And Cable Limited , and understanding them should be part of your investment process.

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.

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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.