Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Yashili International Holdings Ltd (HKG:1230) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Yashili International Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Yashili International Holdings had CN¥427.6m of debt in June 2019, down from CN¥558.8m, one year before. But on the other hand it also has CN¥2.12b in cash, leading to a CN¥1.70b net cash position.
A Look At Yashili International Holdings's Liabilities
According to the last reported balance sheet, Yashili International Holdings had liabilities of CN¥2.24b due within 12 months, and liabilities of CN¥25.5m due beyond 12 months. On the other hand, it had cash of CN¥2.12b and CN¥278.8m worth of receivables due within a year. So it actually has CN¥131.5m more liquid assets than total liabilities.
This surplus suggests that Yashili International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yashili International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yashili International Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Yashili International Holdings reported revenue of CN¥3.3b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Yashili International Holdings?
Although Yashili International Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CN¥45m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like Yashili International Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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