Here's Why Young's Brewery (LON:YNGA) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Young & Co.'s Brewery, P.L.C. (LON:YNGA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Young's Brewery

What Is Young's Brewery's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Young's Brewery had UK£176.4m of debt in March 2021, down from UK£204.9m, one year before. However, it does have UK£4.70m in cash offsetting this, leading to net debt of about UK£171.7m.

How Strong Is Young's Brewery's Balance Sheet?

According to the last reported balance sheet, Young's Brewery had liabilities of UK£52.3m due within 12 months, and liabilities of UK£299.8m due beyond 12 months. Offsetting these obligations, it had cash of UK£4.70m as well as receivables valued at UK£14.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£333.3m.

While this might seem like a lot, it is not so bad since Young's Brewery has a market capitalization of UK£765.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Young's Brewery can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Young's Brewery had a loss before interest and tax, and actually shrunk its revenue by 71%, to UK£91m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Young's Brewery's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable UK£82m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled UK£42m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Young's Brewery's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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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