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. We can see that Yantai Shuangta Food Co., Ltd. (SZSE:002481) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Yantai Shuangta Food
How Much Debt Does Yantai Shuangta Food Carry?
The image below, which you can click on for greater detail, shows that Yantai Shuangta Food had debt of CN¥599.5m at the end of September 2023, a reduction from CN¥1.06b over a year. However, because it has a cash reserve of CN¥307.3m, its net debt is less, at about CN¥292.2m.
How Strong Is Yantai Shuangta Food's Balance Sheet?
We can see from the most recent balance sheet that Yantai Shuangta Food had liabilities of CN¥932.4m falling due within a year, and liabilities of CN¥197.0m due beyond that. Offsetting this, it had CN¥307.3m in cash and CN¥255.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥567.0m more than its cash and near-term receivables, combined.
Of course, Yantai Shuangta Food has a market capitalization of CN¥5.05b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yantai Shuangta Food will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Yantai Shuangta Food had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥2.1b. We would much prefer see growth.
Caveat Emptor
Not only did Yantai Shuangta Food's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥295m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥121m. In the meantime, we consider the stock very risky. 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. Case in point: We've spotted 1 warning sign for Yantai Shuangta Food you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.