Is Y&G Corporation Bhd (KLSE:Y&G) A Risky Investment?

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 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 Y&G Corporation Bhd. (KLSE:Y&G) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Y&G Corporation Bhd

What Is Y&G Corporation Bhd's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Y&G Corporation Bhd had debt of RM45.9m, up from RM39.7m in one year. However, its balance sheet shows it holds RM54.6m in cash, so it actually has RM8.70m net cash.

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

The latest balance sheet data shows that Y&G Corporation Bhd had liabilities of RM36.6m due within a year, and liabilities of RM41.8m falling due after that. On the other hand, it had cash of RM54.6m and RM52.5m worth of receivables due within a year. So it actually has RM28.7m more liquid assets than total liabilities.

This surplus suggests that Y&G Corporation Bhd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Y&G Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Y&G Corporation Bhd grew its EBIT by 138% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Y&G Corporation Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 RM8.70m, as well as more liquid assets than liabilities. The cherry on top was that in converted 209% of that EBIT to free cash flow, bringing in -RM22m. So we don't think Y&G Corporation Bhd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Y&G Corporation Bhd is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.