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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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 June 2024 Yangzijiang Shipbuilding (Holdings) had debt of CN¥6.05b, up from CN¥5.06b in one year. But it also has CN¥22.3b in cash to offset that, meaning it has CN¥16.2b net cash.

A Look At Yangzijiang Shipbuilding (Holdings)'s Liabilities

According to the last reported balance sheet, Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥19.7b due within 12 months, and liabilities of CN¥3.29b due beyond 12 months. On the other hand, it had cash of CN¥22.3b and CN¥6.23b worth of receivables due within a year. So it can boast CN¥5.49b more liquid assets than total liabilities.

This short term liquidity is a sign that Yangzijiang Shipbuilding (Holdings) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Yangzijiang Shipbuilding (Holdings) grew its EBIT by 84% 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 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.

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. Happily for any shareholders, Yangzijiang Shipbuilding (Holdings) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥16.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in CN¥12b. So we don't think Yangzijiang Shipbuilding (Holdings)'s use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Yangzijiang Shipbuilding (Holdings)'s earnings per share history for free.

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.