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 note that YaGuang Technology Group Company Limited (SZSE:300123) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is YaGuang Technology Group's Net Debt?
The image below, which you can click on for greater detail, shows that YaGuang Technology Group had debt of CN¥1.85b at the end of September 2023, a reduction from CN¥1.95b over a year. However, it does have CN¥178.1m in cash offsetting this, leading to net debt of about CN¥1.67b.
How Strong Is YaGuang Technology Group's Balance Sheet?
According to the last reported balance sheet, YaGuang Technology Group had liabilities of CN¥2.91b due within 12 months, and liabilities of CN¥599.7m due beyond 12 months. Offsetting this, it had CN¥178.1m in cash and CN¥2.22b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.11b more than its cash and near-term receivables, combined.
Of course, YaGuang Technology Group has a market capitalization of CN¥6.03b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is YaGuang Technology Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, YaGuang Technology Group reported revenue of CN¥1.8b, which is a gain of 27%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate YaGuang Technology Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥178m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥258m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example - YaGuang Technology Group has 2 warning signs we think 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.