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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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 Yangzijiang Shipbuilding (Holdings)

How Much Debt Does Yangzijiang Shipbuilding (Holdings) Carry?

As you can see below, Yangzijiang Shipbuilding (Holdings) had CN¥4.68b of debt at June 2021, down from CN¥5.65b a year prior. However, its balance sheet shows it holds CN¥22.1b in cash, so it actually has CN¥17.4b net cash.

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

The latest balance sheet data shows that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥9.14b due within a year, and liabilities of CN¥4.01b falling due after that. On the other hand, it had cash of CN¥22.1b and CN¥6.19b worth of receivables due within a year. So it can boast CN¥15.2b more liquid assets than total liabilities.

This luscious liquidity implies that Yangzijiang Shipbuilding (Holdings)'s balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Yangzijiang Shipbuilding (Holdings) saw its EBIT decline by 3.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yangzijiang Shipbuilding (Holdings) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Yangzijiang Shipbuilding (Holdings)'s free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yangzijiang Shipbuilding (Holdings) has net cash of CN¥17.4b, as well as more liquid assets than liabilities. So we don't think Yangzijiang Shipbuilding (Holdings)'s use of debt 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. To that end, you should be aware of the 2 warning signs we've spotted with Yangzijiang Shipbuilding (Holdings) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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