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.' 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&G Corporation Bhd. (KLSE:Y&G) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Y&G Corporation Bhd Carry?

The image below, which you can click on for greater detail, shows that Y&G Corporation Bhd had debt of RM47.1m at the end of December 2024, a reduction from RM53.9m over a year. But on the other hand it also has RM81.0m in cash, leading to a RM33.9m net cash position.

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

The latest balance sheet data shows that Y&G Corporation Bhd had liabilities of RM30.4m due within a year, and liabilities of RM43.2m falling due after that. Offsetting these obligations, it had cash of RM81.0m as well as receivables valued at RM33.1m due within 12 months. So it actually has RM40.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Y&G Corporation Bhd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

View our latest analysis for Y&G Corporation Bhd

Importantly, Y&G Corporation Bhd's EBIT fell a jaw-dropping 82% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 RM33.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM3.8m, being 252% of its EBIT. So we are not troubled with Y&G Corporation Bhd'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. Case in point: We've spotted 4 warning signs for Y&G Corporation Bhd you should be aware of, and 1 of them is a bit unpleasant.

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. 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.