Is Yangzijiang Shipbuilding (Holdings) (SGX:BS6) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yangzijiang Shipbuilding (Holdings)

What Is Yangzijiang Shipbuilding (Holdings)'s Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Yangzijiang Shipbuilding (Holdings) had debt of CN¥5.59b, up from CN¥4.57b in one year. However, it does have CN¥16.6b in cash offsetting this, leading to net cash of CN¥11.0b.

A Look At Yangzijiang Shipbuilding (Holdings)'s Liabilities

We can see from the most recent balance sheet that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥17.6b falling due within a year, and liabilities of CN¥2.15b due beyond that. On the other hand, it had cash of CN¥16.6b and CN¥8.60b worth of receivables due within a year. So it actually has CN¥5.46b more liquid assets than total liabilities.

This excess liquidity suggests that Yangzijiang Shipbuilding (Holdings) is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Yangzijiang Shipbuilding (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Yangzijiang Shipbuilding (Holdings) grew its EBIT by 83% 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 Yangzijiang Shipbuilding (Holdings)'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Yangzijiang Shipbuilding (Holdings) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥11.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 179% of that EBIT to free cash flow, bringing in CN¥7.1b. When it comes to Yangzijiang Shipbuilding (Holdings)'s debt, we sufficiently relaxed that our mind turns to the jacuzzi. Given Yangzijiang Shipbuilding (Holdings) has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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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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.