Here’s Why Yangtze Optical Fiber And Cable Limited (HKG: 6869) Has A Heavy Debt Burden

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Yangtze Fiber Optic and Cable Joint Stock Company (HKG: 6869) uses debt in its business. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.

Check out our latest review for Yangtze Optical Fiber And Cable Limited

What is the net debt of Yangtze Optical Fiber And Cable Limited?

As you can see below, at the end of September 2021, Yangtze Optical Fiber And Cable Limited had CN 3.87 billion in debt, up from CNN 2.29 billion a year ago. Click on the image for more details. On the other hand, he has CN 3.71 billion in cash, resulting in net debt of around CNN 152.3 million.

SEHK: 6869 History of debt to equity December 31, 2021

How strong is Yangtze Optical Fiber And Cable Limited’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Yangtze Optical Fiber And Cable Limited had CN 5.60 billion in liabilities due within 12 months and CN 3.11 billion in liabilities beyond. In return, he had CN 3.71 billion in cash and CN 5.31 billion in receivables due within 12 months. So it actually has CN ¥ 315.2m Following liquid assets as total liabilities.

Considering the size of Yangtze Optical Fiber And Cable Limited, it appears that its liquid assets are well balanced with its total liabilities. So, while it’s hard to imagine the CN Â¥ 17.9ba company struggling to find money, we still think it’s worth watching its balance sheet. But in any case, Yangtze Optical Fiber And Cable Limited has virtually no net debt, so it’s fair to say that it doesn’t have a lot of debt!

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Yangtze Optical Fiber And Cable Limited has a low debt to EBITDA ratio of just 0.23. And remarkably, despite her net debt, she actually received more interest in the past twelve months than she had to pay. So it’s fair to say he can handle debt like a hotshot teppanyaki chef handles the kitchen. In fact, Yangtze Optical Fiber And Cable Limited’s saving grace is its low level of debt, as its EBIT has fallen 45% in the past twelve months. Falling profits (if the trend continues) could potentially make even small debt risky enough. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether Yangtze Optical Fiber And Cable Limited can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. In the past three years, Yangtze Optical Fiber And Cable Limited has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.

Our point of view

As the EBIT growth rate of Yangtze Optical Fiber And Cable Limited makes us nervous. Its interest coverage and its net debt to EBITDA are encouraging signs. Looking at all the angles mentioned above, it seems to us that Yangtze Optical Fiber And Cable Limited is a somewhat risky investment due to its debt. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Yangtze Optical Fiber And Cable Limited you must be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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