YB Ventures Berhad (KLSE:YB) Could Easily Take On More Debt

Simply Wall St
December 01, 2021
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that YB Ventures Berhad (KLSE:YB) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for YB Ventures Berhad

What Is YB Ventures Berhad's Debt?

As you can see below, at the end of September 2021, YB Ventures Berhad had RM48.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RM143.3m in cash, so it actually has RM95.0m net cash.

KLSE:YB Debt to Equity History December 2nd 2021

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 RM14.4m due within 12 months and liabilities of RM67.3m due beyond that. Offsetting these obligations, it had cash of RM143.3m as well as receivables valued at RM22.6m due within 12 months. So it can boast RM84.2m more liquid assets than total liabilities.

This luscious liquidity implies that YB Ventures Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, YB Ventures Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, YB Ventures Berhad turned things around in the last 12 months, delivering and EBIT of RM10m. There's no doubt that we learn most about debt from the balance sheet. But it is YB Ventures Berhad'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. YB Ventures Berhad 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 year, YB Ventures Berhad actually produced more free cash flow than EBIT. 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 YB Ventures Berhad has net cash of RM95.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM18m, being 177% of its EBIT. So we don't think YB Ventures Berhad's use of debt is risky. 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. We've identified 3 warning signs with YB Ventures Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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