Yangtze Optical Fibre And Cable Limited (HKG:6869) Seems To Use Debt Quite Sensibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yangtze Optical Fibre And Cable Limited

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

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Yangtze Optical Fibre And Cable Limited had CN¥4.00b of debt, an increase on CN¥2.05b, over one year. But it also has CN¥4.31b in cash to offset that, meaning it has CN¥308.4m net cash.

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

The latest balance sheet data shows that Yangtze Optical Fibre And Cable Limited had liabilities of CN¥6.56b due within a year, and liabilities of CN¥2.33b falling due after that. Offsetting this, it had CN¥4.31b in cash and CN¥4.73b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Yangtze Optical Fibre And Cable Limited's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥13.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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!

But the other side of the story is that Yangtze Optical Fibre And Cable Limited saw its EBIT decline by 5.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Yangtze Optical Fibre And Cable Limited'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Yangtze Optical Fibre And Cable Limited 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. During the last three years, Yangtze Optical Fibre And Cable Limited burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yangtze Optical Fibre And Cable Limited has net cash of CN¥308.4m, as well as more liquid assets than liabilities. So we are not troubled with Yangtze Optical Fibre And Cable Limited's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yangtze Optical Fibre And Cable Limited is showing 3 warning signs in our investment analysis , you should know about...

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.