Is Guangdong Yueyun Transportation (HKG:3399) Using Debt In A Risky Way?

Warren Buffett famously said, '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 Guangdong Yueyun Transportation Company Limited (HKG:3399) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Guangdong Yueyun Transportation

What Is Guangdong Yueyun Transportation's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Guangdong Yueyun Transportation had debt of CN¥2.55b, up from CN¥2.38b in one year. However, because it has a cash reserve of CN¥1.26b, its net debt is less, at about CN¥1.29b.

How Healthy Is Guangdong Yueyun Transportation's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Yueyun Transportation had liabilities of CN¥3.09b falling due within a year, and liabilities of CN¥4.81b due beyond that. Offsetting these obligations, it had cash of CN¥1.26b as well as receivables valued at CN¥797.1m due within 12 months. So it has liabilities totalling CN¥5.85b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥969.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Guangdong Yueyun Transportation would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Yueyun Transportation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Guangdong Yueyun Transportation had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥5.6b. That's not what we would hope to see.

Caveat Emptor

While Guangdong Yueyun Transportation's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥32m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥229m in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Guangdong Yueyun Transportation (1 makes us a bit uncomfortable) you should be aware of.

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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