These 4 Measures Indicate That China Yuchai International (NYSE:CYD) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that China Yuchai International Limited (NYSE:CYD) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Yuchai International

What Is China Yuchai International's Net Debt?

As you can see below, at the end of December 2020, China Yuchai International had CN¥2.23b of debt, up from CN¥2.06b a year ago. Click the image for more detail. But it also has CN¥6.14b in cash to offset that, meaning it has CN¥3.91b net cash.

A Look At China Yuchai International's Liabilities

According to the last reported balance sheet, China Yuchai International had liabilities of CN¥13.1b due within 12 months, and liabilities of CN¥1.41b due beyond 12 months. On the other hand, it had cash of CN¥6.14b and CN¥8.39b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to China Yuchai International's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.17b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, China Yuchai International boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, China Yuchai International grew its EBIT by 7.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Yuchai International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Yuchai International 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, China Yuchai International's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case China Yuchai International has CN¥3.91b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 7.1% over the last year. So we don't have any problem with China Yuchai International's use of debt. 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. Case in point: We've spotted 1 warning sign for China Yuchai International you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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