Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, YTO Express Group Co.,Ltd. (SHSE:600233) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for YTO Express GroupLtd

How Much Debt Does YTO Express GroupLtd Carry?

As you can see below, YTO Express GroupLtd had CN¥4.26b of debt at September 2023, down from CN¥4.44b a year prior. However, it does have CN¥10.8b in cash offsetting this, leading to net cash of CN¥6.53b.

How Strong Is YTO Express GroupLtd's Balance Sheet?

According to the last reported balance sheet, YTO Express GroupLtd had liabilities of CN¥11.3b due within 12 months, and liabilities of CN¥1.11b due beyond 12 months. Offsetting these obligations, it had cash of CN¥10.8b as well as receivables valued at CN¥1.52b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that YTO Express GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥40.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, YTO Express GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that YTO Express GroupLtd saw its EBIT decline by 6.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 YTO Express GroupLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While YTO Express GroupLtd 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. In the last three years, YTO Express GroupLtd created free cash flow amounting to 7.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about YTO Express GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.53b. So we don't have any problem with YTO Express GroupLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for YTO Express GroupLtd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.