These 4 metrics indicate that Guangdong Yueyun Transportation (HKG: 3399) is using debt risky
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Guangdong Yueyun Transportation Company Limited (HKG: 3399) has debt on its balance sheet. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for Guangdong Yueyun Transportation
What is the debt of Guangdong Yueyun Transportation?
As you can see below, Guangdong Yueyun Transportation had a debt of CNN 2.25 billion in June 2021, up from CNN 2.60 billion the year before. On the other hand, he has CN 1.28 billion in cash, resulting in net debt of around CNN 971.6 million.
How strong is Guangdong Yueyun Transportation’s balance sheet?
According to the latest published balance sheet, Guangdong Yueyun Transportation had debts of 3.00 billion yuan due within 12 months and debts of 4.67 billion cts due beyond 12 months. In compensation for these obligations, he had cash of CND 1.28 billion as well as receivables valued at CNN 799.8 million due within 12 months. Its liabilities therefore total CNS 5.59 billion more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the CN 907.9million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym gear, and a trumpet. . We would therefore be watching its record closely, without a doubt. After all, Guangdong Yueyun Transportation would likely need a major recapitalization if it were to pay its creditors today.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Guangdong Yueyun Transportation has a very low debt to EBITDA ratio of 1.2, so it is strange to see low interest coverage as last year’s EBIT was only 0.47 times interest expense. So while we are not necessarily alarmed, we think his debt is far from negligible. It is important to note that Guangdong Yueyun Transportation’s EBIT has fallen 42% in the past twelve months. If this decline continues, then it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Guangdong Yueyun Transportation will need revenue to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. In the past three years, Guangdong Yueyun Transportation has reported free cash flow of 15% of its EBIT, which is really quite low. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
To be frank, Guangdong Yueyun Transportation’s EBIT growth rate and track record of controlling its total liabilities make us rather uncomfortable with its debt levels. But at least it manages its debt fairly well, based on its EBITDA; it’s encouraging. Considering all of the above factors, it seems that Guangdong Yueyun Transportation has too much debt. While some investors like this kind of risky game, it is certainly not our cup of tea. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Guangdong Yueyun Transportation has 2 warning signs we think you should be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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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 shares 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 material. Simply Wall St has no position in the mentioned stocks.
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