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 note that Yijiahe Technology Co., Ltd. (SHSE:603666) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Yijiahe Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Yijiahe Technology had CN¥691.1m of debt, an increase on CN¥655.3m, over one year. However, because it has a cash reserve of CN¥615.3m, its net debt is less, at about CN¥75.8m.
How Healthy Is Yijiahe Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yijiahe Technology had liabilities of CN¥1.07b due within 12 months and liabilities of CN¥213.2m due beyond that. Offsetting these obligations, it had cash of CN¥615.3m as well as receivables valued at CN¥986.7m due within 12 months. So it can boast CN¥316.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Yijiahe Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Yijiahe Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Yijiahe Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Yijiahe Technology had a loss before interest and tax, and actually shrunk its revenue by 61%, to CN¥461m. To be frank that doesn't bode well.
Caveat Emptor
Not only did Yijiahe Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥209m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Yijiahe Technology's profit, revenue, and operating cashflow have changed over the last few years.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.