We Think Yan Tat Group Holdings (HKG:1480) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yan Tat Group Holdings Limited (HKG:1480) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yan Tat Group Holdings

What Is Yan Tat Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Yan Tat Group Holdings had HK$20.3m of debt in June 2021, down from HK$61.2m, one year before. However, it does have HK$247.4m in cash offsetting this, leading to net cash of HK$227.0m.

How Healthy Is Yan Tat Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Yan Tat Group Holdings had liabilities of HK$266.6m falling due within a year, and liabilities of HK$156.8m due beyond that. On the other hand, it had cash of HK$247.4m and HK$248.3m worth of receivables due within a year. So it actually has HK$72.3m more liquid assets than total liabilities.

It's good to see that Yan Tat Group Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Yan Tat Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Yan Tat Group Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yan Tat Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yan Tat Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Yan Tat Group Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Yan Tat Group Holdings has HK$227.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$71m, being 164% of its EBIT. So we don't think Yan Tat Group Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Yan Tat Group Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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