Young's Brewery (LON:YNGA) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Young & Co.'s Brewery, P.L.C. (LON:YNGA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Young's Brewery

How Much Debt Does Young's Brewery Carry?

As you can see below, Young's Brewery had UK£168.7m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had UK£39.8m in cash, and so its net debt is UK£128.9m.

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

We can see from the most recent balance sheet that Young's Brewery had liabilities of UK£70.9m falling due within a year, and liabilities of UK£298.9m due beyond that. Offsetting this, it had UK£39.8m in cash and UK£10.3m in receivables that were due within 12 months. So its liabilities total UK£319.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Young's Brewery has a market capitalization of UK£614.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Young's Brewery's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Young's Brewery had a loss before interest and tax, and actually shrunk its revenue by 37%, to UK£199m. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at UK£23m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£1.2m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 2 warning signs for Young's Brewery that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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