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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Yangzijiang Shipbuilding (Holdings)
What Is Yangzijiang Shipbuilding (Holdings)'s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Yangzijiang Shipbuilding (Holdings) had debt of CN¥5.23b, up from CN¥3.77b in one year. However, it does have CN¥19.4b in cash offsetting this, leading to net cash of CN¥14.2b.
How Healthy Is Yangzijiang Shipbuilding (Holdings)'s Balance Sheet?
According to the last reported balance sheet, Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥9.70b due within 12 months, and liabilities of CN¥4.87b due beyond 12 months. Offsetting these obligations, it had cash of CN¥19.4b as well as receivables valued at CN¥8.55b due within 12 months. So it can boast CN¥13.4b more liquid assets than total liabilities.
This surplus strongly suggests that Yangzijiang Shipbuilding (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Yangzijiang Shipbuilding (Holdings) saw its EBIT decline by 4.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yangzijiang Shipbuilding (Holdings) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.