These 4 Measures Indicate That Yuexiu Transport Infrastructure (HKG:1052) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Yuexiu Transport Infrastructure Limited (HKG:1052) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yuexiu Transport Infrastructure

How Much Debt Does Yuexiu Transport Infrastructure Carry?

The chart below, which you can click on for greater detail, shows that Yuexiu Transport Infrastructure had CN¥17.8b in debt in June 2021; about the same as the year before. However, it does have CN¥1.91b in cash offsetting this, leading to net debt of about CN¥15.9b.

A Look At Yuexiu Transport Infrastructure's Liabilities

Zooming in on the latest balance sheet data, we can see that Yuexiu Transport Infrastructure had liabilities of CN¥3.52b due within 12 months and liabilities of CN¥19.0b due beyond that. Offsetting these obligations, it had cash of CN¥1.91b as well as receivables valued at CN¥350.2m due within 12 months. So it has liabilities totalling CN¥20.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥6.39b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Yuexiu Transport Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Yuexiu Transport Infrastructure's debt is 5.0 times its EBITDA, and its EBIT cover its interest expense 3.0 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. The silver lining is that Yuexiu Transport Infrastructure grew its EBIT by 101% last year, which nourishing like the idealism of youth. If it can keep walking that path it will be in a position to shed its debt with relative ease. 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 Yuexiu Transport Infrastructure'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Yuexiu Transport Infrastructure actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

While Yuexiu Transport Infrastructure's level of total liabilities has us nervous. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. We should also note that Infrastructure industry companies like Yuexiu Transport Infrastructure commonly do use debt without problems. We think that Yuexiu Transport Infrastructure's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Yuexiu Transport Infrastructure (of which 1 is significant!) 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.

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.

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