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.' 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. Importantly, Sichuan Yahua Industrial Group Co., Ltd. (SZSE:002497) does carry debt. But is this debt a concern to shareholders?

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. 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. 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.

What Is Sichuan Yahua Industrial Group's Debt?

As you can see below, at the end of September 2023, Sichuan Yahua Industrial Group had CN¥1.58b of debt, up from CN¥440.0m a year ago. Click the image for more detail. But it also has CN¥3.64b in cash to offset that, meaning it has CN¥2.07b net cash.

A Look At Sichuan Yahua Industrial Group's Liabilities

The latest balance sheet data shows that Sichuan Yahua Industrial Group had liabilities of CN¥3.84b due within a year, and liabilities of CN¥875.6m falling due after that. On the other hand, it had cash of CN¥3.64b and CN¥2.92b worth of receivables due within a year. So it can boast CN¥1.85b more liquid assets than total liabilities.

This short term liquidity is a sign that Sichuan Yahua Industrial Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sichuan Yahua Industrial Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Sichuan Yahua Industrial Group's load is not too heavy, because its EBIT was down 54% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sichuan Yahua Industrial Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sichuan Yahua Industrial Group 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. Over the last three years, Sichuan Yahua Industrial Group reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sichuan Yahua Industrial Group has CN¥2.07b in net cash and a decent-looking balance sheet. So we don't have any problem with Sichuan Yahua Industrial Group's use of debt. 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. For example Sichuan Yahua Industrial Group has 3 warning signs (and 1 which is significant) we think 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.