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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Y&G Corporation Bhd. (KLSE:Y&G) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Y&G Corporation Bhd

What Is Y&G Corporation Bhd's Debt?

As you can see below, Y&G Corporation Bhd had RM35.2m of debt at March 2023, down from RM41.9m a year prior. However, it does have RM53.4m in cash offsetting this, leading to net cash of RM18.1m.

How Strong Is Y&G Corporation Bhd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Y&G Corporation Bhd had liabilities of RM41.8m due within 12 months and liabilities of RM35.8m due beyond that. Offsetting these obligations, it had cash of RM53.4m as well as receivables valued at RM74.9m due within 12 months. So it actually has RM50.6m more liquid assets than total liabilities.

This surplus strongly suggests that Y&G Corporation Bhd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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.

It is just as well that Y&G Corporation Bhd's load is not too heavy, because its EBIT was down 33% 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 you can't view debt in total isolation; since Y&G Corporation Bhd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Y&G Corporation Bhd has RM18.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM27m, being 199% of its EBIT. So we don't think Y&G Corporation Bhd's use of debt is risky. 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. For example - Y&G Corporation Bhd has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.