These 4 Measures Indicate That Y&G Corporation Bhd (KLSE:Y&G) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Y&G Corporation Bhd. (KLSE:Y&G) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Y&G Corporation Bhd

How Much Debt Does Y&G Corporation Bhd Carry?

As you can see below, Y&G Corporation Bhd had RM35.9m of debt at December 2022, down from RM45.4m a year prior. But it also has RM80.7m in cash to offset that, meaning it has RM44.8m net cash.

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

We can see from the most recent balance sheet that Y&G Corporation Bhd had liabilities of RM36.5m falling due within a year, and liabilities of RM37.0m due beyond that. Offsetting this, it had RM80.7m in cash and RM52.1m in receivables that were due within 12 months. So it actually has RM59.4m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Y&G Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Y&G Corporation Bhd saw its EBIT decline by 9.9% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. 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 RM44.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in RM70m. So is Y&G Corporation Bhd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Y&G Corporation Bhd (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.