Does Y-Entec (KOSDAQ:067900) Have A Healthy Balance Sheet?

April 08, 2021
  •  Updated
August 13, 2022
KOSDAQ:A067900
Source: Shutterstock

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.' 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. We note that Y-Entec Co., Ltd. (KOSDAQ:067900) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Y-Entec

What Is Y-Entec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Y-Entec had ₩71.3b of debt in December 2020, down from ₩84.8b, one year before. However, it does have ₩24.3b in cash offsetting this, leading to net debt of about ₩47.1b.

debt-equity-history-analysis
KOSDAQ:A067900 Debt to Equity History April 9th 2021

How Healthy Is Y-Entec's Balance Sheet?

We can see from the most recent balance sheet that Y-Entec had liabilities of ₩64.5b falling due within a year, and liabilities of ₩38.5b due beyond that. On the other hand, it had cash of ₩24.3b and ₩9.03b worth of receivables due within a year. So it has liabilities totalling ₩69.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Y-Entec is worth ₩311.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Y-Entec's net debt is only 1.2 times its EBITDA. And its EBIT covers its interest expense a whopping 17.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Y-Entec grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Y-Entec 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Y-Entec recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Y-Entec's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. All these things considered, it appears that Y-Entec can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Y-Entec you should be aware of.

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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