Is Y&G Corporation Bhd (KLSE:Y&G) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Y&G Corporation Bhd. (KLSE:Y&G) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 Net Debt?

As you can see below, at the end of December 2023, Y&G Corporation Bhd had RM53.9m of debt, up from RM35.9m a year ago. Click the image for more detail. But on the other hand it also has RM105.0m in cash, leading to a RM51.1m net cash position.

A Look At Y&G Corporation Bhd's Liabilities

The latest balance sheet data shows that Y&G Corporation Bhd had liabilities of RM24.8m due within a year, and liabilities of RM55.3m falling due after that. Offsetting these obligations, it had cash of RM105.0m as well as receivables valued at RM29.5m due within 12 months. So it can boast RM54.5m more liquid assets than total liabilities.

This luscious liquidity implies that Y&G Corporation Bhd's balance sheet is sturdy like a giant sequoia tree. 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.

The modesty of its debt load may become crucial for Y&G Corporation Bhd if management cannot prevent a repeat of the 27% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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 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 RM51.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in -RM4.7m. So is Y&G Corporation Bhd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Y&G Corporation Bhd (1 is a bit unpleasant!) that you should be aware of before investing here.

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.