Does Yangzijiang Shipbuilding (Holdings) (SGX:BS6) Have A Healthy Balance Sheet?

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 Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Yangzijiang Shipbuilding (Holdings)

What Is Yangzijiang Shipbuilding (Holdings)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Yangzijiang Shipbuilding (Holdings) had CN¥4.60b of debt in March 2021, down from CN¥4.91b, one year before. However, it does have CN¥27.1b in cash offsetting this, leading to net cash of CN¥22.5b.

How Strong Is Yangzijiang Shipbuilding (Holdings)'s Balance Sheet?

We can see from the most recent balance sheet that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥10.5b falling due within a year, and liabilities of CN¥3.64b due beyond that. Offsetting these obligations, it had cash of CN¥27.1b as well as receivables valued at CN¥5.67b due within 12 months. So it can boast CN¥18.7b more liquid assets than total liabilities.

This surplus liquidity suggests that Yangzijiang Shipbuilding (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Yangzijiang Shipbuilding (Holdings) grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Yangzijiang Shipbuilding (Holdings) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yangzijiang Shipbuilding (Holdings) 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, Yangzijiang Shipbuilding (Holdings) generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥22.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥6.1b, being 96% of its EBIT. The bottom line is that we do not find Yangzijiang Shipbuilding (Holdings)'s debt levels at all concerning. 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. We've identified 2 warning signs with Yangzijiang Shipbuilding (Holdings) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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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