Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Yintai Gold Co., Ltd. (SZSE:000975) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Yintai Gold
What Is Yintai Gold's Debt?
The image below, which you can click on for greater detail, shows that Yintai Gold had debt of CN¥644.4m at the end of June 2023, a reduction from CN¥896.8m over a year. However, it does have CN¥3.16b in cash offsetting this, leading to net cash of CN¥2.52b.
How Healthy Is Yintai Gold's Balance Sheet?
According to the last reported balance sheet, Yintai Gold had liabilities of CN¥1.85b due within 12 months, and liabilities of CN¥496.3m due beyond 12 months. Offsetting this, it had CN¥3.16b in cash and CN¥145.4m in receivables that were due within 12 months. So it actually has CN¥958.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Yintai Gold could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Yintai Gold boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Yintai Gold grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yintai Gold'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. Yintai Gold may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Yintai Gold generated free cash flow amounting to a very robust 87% 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 Yintai Gold has CN¥2.52b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 87% of its EBIT. So we don't think Yintai Gold's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Yintai Gold you should be aware of.
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.