Does Yunhong CTI (NASDAQ:CTIB) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Yunhong CTI Ltd. (NASDAQ:CTIB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yunhong CTI

What Is Yunhong CTI's Net Debt?

The image below, which you can click on for greater detail, shows that Yunhong CTI had debt of US$5.95m at the end of September 2022, a reduction from US$8.22m over a year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Yunhong CTI's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yunhong CTI had liabilities of US$8.29m due within 12 months and liabilities of US$5.21m due beyond that. Offsetting these obligations, it had cash of US$101.0k as well as receivables valued at US$1.41m due within 12 months. So its liabilities total US$12.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Yunhong CTI is worth US$23.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yunhong CTI's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Yunhong CTI made a loss at the EBIT level, and saw its revenue drop to US$19m, which is a fall of 3.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Yunhong CTI produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$246k of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Yunhong CTI (including 4 which are a bit concerning) .

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. 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.