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. Importantly, Guangdong Yueyun Transportation Company Limited (HKG:3399) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Guangdong Yueyun Transportation
What Is Guangdong Yueyun Transportation's Net Debt?
The image below, which you can click on for greater detail, shows that Guangdong Yueyun Transportation had debt of CN¥1.40b at the end of June 2024, a reduction from CN¥1.86b over a year. But it also has CN¥1.50b in cash to offset that, meaning it has CN¥102.5m net cash.
How Healthy Is Guangdong Yueyun Transportation's Balance Sheet?
We can see from the most recent balance sheet that Guangdong Yueyun Transportation had liabilities of CN¥2.80b falling due within a year, and liabilities of CN¥3.17b due beyond that. Offsetting these obligations, it had cash of CN¥1.50b as well as receivables valued at CN¥966.5m due within 12 months. So it has liabilities totalling CN¥3.49b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the CN¥1.01b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Guangdong Yueyun Transportation would probably need a major re-capitalization if its creditors were to demand repayment. Given that Guangdong Yueyun Transportation has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
Even more impressive was the fact that Guangdong Yueyun Transportation grew its EBIT by 179% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangdong Yueyun Transportation'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Guangdong Yueyun Transportation may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Guangdong Yueyun Transportation actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While Guangdong Yueyun Transportation does have more liabilities than liquid assets, it also has net cash of CN¥102.5m. And it impressed us with free cash flow of CN¥1.1b, being 357% of its EBIT. So we don't have any problem with Guangdong Yueyun Transportation's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Guangdong Yueyun Transportation (including 1 which is a bit unpleasant) .
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.