Here's Why YB Ventures Berhad (KLSE:YB) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that YB Ventures Berhad (KLSE:YB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for YB Ventures Berhad

How Much Debt Does YB Ventures Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2024 YB Ventures Berhad had debt of RM24.5m, up from RM20.9m in one year. However, it does have RM20.6m in cash offsetting this, leading to net debt of about RM3.97m.

A Look At YB Ventures Berhad's Liabilities

Zooming in on the latest balance sheet data, we can see that YB Ventures Berhad had liabilities of RM34.5m due within 12 months and liabilities of RM21.5m due beyond that. Offsetting this, it had RM20.6m in cash and RM22.9m in receivables that were due within 12 months. So it has liabilities totalling RM12.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since YB Ventures Berhad has a market capitalization of RM39.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since YB Ventures Berhad 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.

Over 12 months, YB Ventures Berhad saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, YB Ventures Berhad had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM35m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RM18m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for YB Ventures Berhad that you should be aware of before investing here.

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.