Is Yunhong Green CTI (NASDAQ:YHGJ) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Yunhong Green CTI Ltd. (NASDAQ:YHGJ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Yunhong Green CTI's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Yunhong Green CTI had US$7.53m of debt, an increase on US$7.01m, over one year. However, it also had US$220.0k in cash, and so its net debt is US$7.31m.

A Look At Yunhong Green CTI's Liabilities

Zooming in on the latest balance sheet data, we can see that Yunhong Green CTI had liabilities of US$11.4m due within 12 months and liabilities of US$3.47m due beyond that. Offsetting these obligations, it had cash of US$220.0k as well as receivables valued at US$5.40m due within 12 months. So it has liabilities totalling US$9.25m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Yunhong Green CTI is worth US$26.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yunhong Green 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.

View our latest analysis for Yunhong Green CTI

In the last year Yunhong Green CTI's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Yunhong Green CTI produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$612k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$1.6m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Yunhong Green CTI (of which 1 is potentially serious!) you should know about.

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.

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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.