We Think Y&G Corporation Bhd (KLSE:Y&G) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Y&G Corporation Bhd. (KLSE:Y&G) does carry debt. But should shareholders be worried about its use of debt?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Y&G Corporation Bhd

What Is Y&G Corporation Bhd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Y&G Corporation Bhd had debt of RM39.9m, up from RM9.90m in one year. But on the other hand it also has RM59.6m in cash, leading to a RM19.6m net cash position.

How Healthy 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 RM43.7m due within 12 months and liabilities of RM43.1m due beyond that. On the other hand, it had cash of RM59.6m and RM44.2m worth of receivables due within a year. So it can boast RM17.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Y&G Corporation Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 26% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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. Happily for any shareholders, Y&G Corporation Bhd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 RM19.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM15m, being 220% of its EBIT. So we don't have any problem with Y&G Corporation Bhd's use of debt. 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. Be aware that Y&G Corporation Bhd is showing 3 warning signs in our investment analysis , and 1 of those is significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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