Does Y&G Corporation Bhd (KLSE:Y&G) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Y&G Corporation Bhd (KLSE:Y&G) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Y&G Corporation Bhd

What Is Y&G Corporation Bhd's Net Debt?

As you can see below, at the end of September 2020, Y&G Corporation Bhd had RM39.7m of debt, up from RM6.94m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM72.1m in cash, so it actually has RM32.4m net cash.

A Look At Y&G Corporation Bhd's Liabilities

According to the last reported balance sheet, Y&G Corporation Bhd had liabilities of RM43.0m due within 12 months, and liabilities of RM48.2m due beyond 12 months. Offsetting these obligations, it had cash of RM72.1m as well as receivables valued at RM29.6m due within 12 months. So it actually has RM10.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Y&G Corporation Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Y&G Corporation Bhd has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Y&G Corporation Bhd if management cannot prevent a repeat of the 71% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Y&G Corporation Bhd'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. Y&G Corporation Bhd 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. Over the last three years, Y&G Corporation Bhd actually produced more free cash flow than EBIT. 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 Y&G Corporation Bhd has net cash of RM32.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM4.4m, being 171% of its EBIT. So we are not troubled with Y&G Corporation Bhd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Y&G Corporation Bhd (of which 2 don't sit too well with us!) you should know about.

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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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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