Is Yash Optics & Lens (NSE:YASHOPTICS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Yash Optics & Lens Limited (NSE:YASHOPTICS) does use debt in its business. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yash Optics & Lens

How Much Debt Does Yash Optics & Lens Carry?

The image below, which you can click on for greater detail, shows that Yash Optics & Lens had debt of ₹164.1m at the end of September 2024, a reduction from ₹252.6m over a year. But on the other hand it also has ₹386.6m in cash, leading to a ₹222.5m net cash position.

How Strong Is Yash Optics & Lens' Balance Sheet?

We can see from the most recent balance sheet that Yash Optics & Lens had liabilities of ₹55.3m falling due within a year, and liabilities of ₹172.5m due beyond that. On the other hand, it had cash of ₹386.6m and ₹159.6m worth of receivables due within a year. So it actually has ₹318.4m more liquid assets than total liabilities.

This excess liquidity suggests that Yash Optics & Lens is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Yash Optics & Lens boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Yash Optics & Lens grew its EBIT by 9.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yash Optics & Lens's earnings that will influence how the balance sheet holds up in the future. 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. Yash Optics & Lens 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. During the last three years, Yash Optics & Lens burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yash Optics & Lens has ₹222.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.8% over the last year. So we are not troubled with Yash Optics & Lens's debt use. 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. To that end, you should learn about the 3 warning signs we've spotted with Yash Optics & Lens (including 1 which is potentially serious) .

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. 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.