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 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 can see that Foshan Yowant Technology Co.,Ltd (SZSE:002291) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Foshan Yowant TechnologyLtd
How Much Debt Does Foshan Yowant TechnologyLtd Carry?
As you can see below, at the end of September 2023, Foshan Yowant TechnologyLtd had CN¥812.6m of debt, up from CN¥642.3m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥739.9m, its net debt is less, at about CN¥72.7m.
How Healthy Is Foshan Yowant TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that Foshan Yowant TechnologyLtd had liabilities of CN¥1.51b due within a year, and liabilities of CN¥50.1m falling due after that. Offsetting these obligations, it had cash of CN¥739.9m as well as receivables valued at CN¥1.41b due within 12 months. So it actually has CN¥590.6m more liquid assets than total liabilities.
This surplus suggests that Foshan Yowant TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Foshan Yowant TechnologyLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Foshan Yowant TechnologyLtd'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 Foshan Yowant TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to CN¥4.3b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months Foshan Yowant TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥974m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Foshan Yowant TechnologyLtd (at least 1 which is concerning) , and understanding them should be part of your investment process.
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.