Is Yancoal Australia (ASX:YAL) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Yancoal Australia Ltd (ASX:YAL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yancoal Australia

What Is Yancoal Australia's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Yancoal Australia had debt of AU$3.86b, up from AU$3.04b in one year. On the flip side, it has AU$539.0m in cash leading to net debt of about AU$3.32b.

How Strong Is Yancoal Australia's Balance Sheet?

We can see from the most recent balance sheet that Yancoal Australia had liabilities of AU$1.10b falling due within a year, and liabilities of AU$4.56b due beyond that. Offsetting these obligations, it had cash of AU$539.0m as well as receivables valued at AU$487.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$4.63b.

This is a mountain of leverage relative to its market capitalization of AU$4.96b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yancoal Australia'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.

In the last year Yancoal Australia had a loss before interest and tax, and actually shrunk its revenue by 20%, to AU$3.3b. That makes us nervous, to say the least.

Caveat Emptor

While Yancoal Australia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at AU$284m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of AU$1.8b. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Yancoal Australia (of which 2 are a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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