Yan Tat Group Holdings (HKG:1480) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yan Tat Group Holdings

What Is Yan Tat Group Holdings's Net Debt?

As you can see below, Yan Tat Group Holdings had HK$61.2m of debt at June 2020, down from HK$122.4m a year prior. However, it does have HK$261.0m in cash offsetting this, leading to net cash of HK$199.7m.

How Healthy Is Yan Tat Group Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yan Tat Group Holdings had liabilities of HK$222.0m due within 12 months and liabilities of HK$141.9m due beyond that. Offsetting this, it had HK$261.0m in cash and HK$162.8m in receivables that were due within 12 months. So it actually has HK$59.8m more liquid assets than total liabilities.

This excess liquidity suggests that Yan Tat Group Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Yan Tat Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Yan Tat Group Holdings's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yan Tat Group Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yan Tat Group Holdings has net cash of HK$199.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in HK$90m. 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. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Yan Tat Group Holdings you should know about.

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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This article by Simply Wall St is general in nature. 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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