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.' 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. We note that Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Yangzijiang Shipbuilding (Holdings)'s Debt?

As you can see below, at the end of December 2023, Yangzijiang Shipbuilding (Holdings) had CN¥5.59b of debt, up from CN¥4.57b a year ago. Click the image for more detail. But on the other hand it also has CN¥16.6b in cash, leading to a CN¥11.0b net cash position.

How Healthy Is Yangzijiang Shipbuilding (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥17.6b due within 12 months and liabilities of CN¥2.15b due beyond that. On the other hand, it had cash of CN¥16.6b and CN¥8.60b worth of receivables due within a year. So it actually has CN¥5.46b more liquid assets than total liabilities.

This surplus suggests that Yangzijiang Shipbuilding (Holdings) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Yangzijiang Shipbuilding (Holdings) has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yangzijiang Shipbuilding (Holdings)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Yangzijiang Shipbuilding (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Yangzijiang Shipbuilding (Holdings) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥11.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in CN¥7.2b. So we don't think Yangzijiang Shipbuilding (Holdings)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Yangzijiang Shipbuilding (Holdings) , and understanding them should be part of your investment process.

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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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.