We Think Yangzijiang Shipbuilding (Holdings) (SGX:BS6) Can Manage Its Debt With Ease

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 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. We note that Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yangzijiang Shipbuilding (Holdings)

How Much Debt Does Yangzijiang Shipbuilding (Holdings) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yangzijiang Shipbuilding (Holdings) had CN¥5.53b of debt, an increase on CN¥5.06b, over one year. However, its balance sheet shows it holds CN¥24.7b in cash, so it actually has CN¥19.1b net cash.

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

The latest balance sheet data shows that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥10.0b due within a year, and liabilities of CN¥2.99b falling due after that. On the other hand, it had cash of CN¥24.7b and CN¥5.96b worth of receivables due within a year. So it actually has CN¥17.6b more liquid assets than total liabilities.

This surplus strongly suggests that Yangzijiang Shipbuilding (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

Yangzijiang Shipbuilding (Holdings)'s EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yangzijiang Shipbuilding (Holdings) 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. Over the most recent three years, Yangzijiang Shipbuilding (Holdings) recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥19.1b in net cash and a decent-looking balance sheet. So is Yangzijiang Shipbuilding (Holdings)'s debt a risk? It doesn't seem so to us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Yangzijiang Shipbuilding (Holdings) , and understanding them should be part of your investment process.

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. 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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