Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Yashili International Holdings Ltd (HKG:1230) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yashili International Holdings

What Is Yashili International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Yashili International Holdings had CN¥320.8m of debt in December 2021, down from CN¥365.9m, one year before. But on the other hand it also has CN¥2.13b in cash, leading to a CN¥1.81b net cash position.

How Strong Is Yashili International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yashili International Holdings had liabilities of CN¥1.71b due within 12 months and liabilities of CN¥40.3m due beyond that. Offsetting these obligations, it had cash of CN¥2.13b as well as receivables valued at CN¥444.7m due within 12 months. So it actually has CN¥819.5m more liquid assets than total liabilities.

This surplus suggests that Yashili International Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Yashili International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yashili International 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.

In the last year Yashili International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥4.4b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Yashili International Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Yashili International Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥502m and booked a CN¥81m accounting loss. With only CN¥1.81b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Yashili International Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 1 warning sign for Yashili International Holdings you should be aware of.

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.

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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.