Yunhong Green CTI (NASDAQ:YHGJ) Is Making Moderate Use Of 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Yunhong Green CTI Ltd. (NASDAQ:YHGJ) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yunhong Green CTI

What Is Yunhong Green CTI's Net Debt?

The image below, which you can click on for greater detail, shows that Yunhong Green CTI had debt of US$5.22m at the end of September 2023, a reduction from US$5.95m over a year. Net debt is about the same, since the it doesn't have much cash.

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$8.37m due within 12 months and liabilities of US$2.98m due beyond that. Offsetting this, it had US$64.0k in cash and US$933.0k in receivables that were due within 12 months. So it has liabilities totalling US$10.3m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Yunhong Green CTI is worth US$37.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yunhong Green CTI will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Yunhong Green CTI had a loss before interest and tax, and actually shrunk its revenue by 13%, to US$17m. We would much prefer see growth.

Caveat Emptor

While Yunhong Green CTI's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$1.1m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$843k into a profit. So we do think this stock is quite risky. 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 3 warning signs for Yunhong Green CTI you should be aware of, and 1 of them is significant.

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.