The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shanghai Yaohua Pilkington Glass Group Co., Ltd. (SHSE:600819) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Shanghai Yaohua Pilkington Glass Group Carry?
The image below, which you can click on for greater detail, shows that Shanghai Yaohua Pilkington Glass Group had debt of CN¥780.5m at the end of December 2023, a reduction from CN¥891.1m over a year. But it also has CN¥1.18b in cash to offset that, meaning it has CN¥397.3m net cash.
How Healthy Is Shanghai Yaohua Pilkington Glass Group's Balance Sheet?
We can see from the most recent balance sheet that Shanghai Yaohua Pilkington Glass Group had liabilities of CN¥2.83b falling due within a year, and liabilities of CN¥671.0m due beyond that. Offsetting this, it had CN¥1.18b in cash and CN¥1.12b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.
Shanghai Yaohua Pilkington Glass Group has a market capitalization of CN¥3.82b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Shanghai Yaohua Pilkington Glass Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai Yaohua Pilkington Glass Group 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.
Over 12 months, Shanghai Yaohua Pilkington Glass Group reported revenue of CN¥5.6b, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Shanghai Yaohua Pilkington Glass Group?
While Shanghai Yaohua Pilkington Glass Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥266m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for Shanghai Yaohua Pilkington Glass Group you should be aware of.
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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