$YANGZIJIANG SHIPBLDG HLDGS LTD(BS6.SI)$
According to the last reported balance sheet, Yangzijiang Shipbuilding (Holdings) had liabilities of CN¥11.8b due within 12 months, and liabilities of CN¥3.75b due beyond 12 months. Offsetting these obligations, it had cash of CN¥28.6b as well as receivables valued at CN¥5.91b due within 12 months. So it can boast CN¥18.9b more liquid assets than total liabilities.
This excess liquidity is a great indication that Yangzijiang Shipbuilding (Holdings)'s balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yangzijiang Shipbuilding (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Yangzijiang Shipbuilding (Holdings) has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Yangzijiang Shipbuilding (Holdings)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might findthis free report on analyst profit forecaststo be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yangzijiang Shipbuilding (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Yangzijiang Shipbuilding (Holdings) recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to investigate a company's debt, in this case Yangzijiang Shipbuilding (Holdings) has CN¥24.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥5.5b, being 82% of its EBIT. So is Yangzijiang Shipbuilding (Holdings)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it.
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