Yangzijiang Shipbuilding (Holdings) (SGX:BS6) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Yangzijiang Shipbuilding (Holdings) had debt of CN¥4.60b at the end of March 2021, a reduction from CN¥4.91b over a year. But on the other hand it also has CN¥27.1b in cash, leading to a CN¥22.5b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥10.5b due within 12 months and liabilities of CN¥3.64b due beyond that. Offsetting this, it had CN¥27.1b in cash and CN¥5.67b in receivables that were due within 12 months. So it actually has CN¥18.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that Yangzijiang Shipbuilding (Holdings)'s balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Yangzijiang Shipbuilding (Holdings) has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Yangzijiang Shipbuilding (Holdings) generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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 95% of its EBIT. When it comes to Yangzijiang Shipbuilding (Holdings)'s debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 2 warning signs for Yangzijiang Shipbuilding (Holdings) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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