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 Yunnan Baiyao Group Co.,Ltd (SZSE:000538) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Yunnan Baiyao GroupLtd

What Is Yunnan Baiyao GroupLtd's Debt?

The image below, which you can click on for greater detail, shows that Yunnan Baiyao GroupLtd had debt of CN¥1.46b at the end of September 2023, a reduction from CN¥1.90b over a year. But it also has CN¥13.4b in cash to offset that, meaning it has CN¥11.9b net cash.

A Look At Yunnan Baiyao GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Yunnan Baiyao GroupLtd had liabilities of CN¥12.4b due within 12 months and liabilities of CN¥1.09b due beyond that. Offsetting these obligations, it had cash of CN¥13.4b as well as receivables valued at CN¥12.0b due within 12 months. So it can boast CN¥12.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Yunnan Baiyao GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yunnan Baiyao GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Yunnan Baiyao GroupLtd grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yunnan Baiyao 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 company can only pay off debt with cold hard cash, not accounting profits. While Yunnan Baiyao 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. During the last three years, Yunnan Baiyao GroupLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yunnan Baiyao GroupLtd has CN¥11.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.3b, being 84% of its EBIT. So we don't think Yunnan Baiyao GroupLtd'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Yunnan Baiyao GroupLtd you should know about.

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.

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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.