Does YBS International Berhad (KLSE:YBS) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that YBS International Berhad (KLSE:YBS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for YBS International Berhad

What Is YBS International Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 YBS International Berhad had debt of RM8.70m, up from RM7.16m in one year. However, it also had RM8.67m in cash, and so its net debt is RM34.0k.

How Healthy Is YBS International Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YBS International Berhad had liabilities of RM14.8m due within 12 months and liabilities of RM6.32m due beyond that. On the other hand, it had cash of RM8.67m and RM16.8m worth of receivables due within a year. So it can boast RM4.36m more liquid assets than total liabilities.

This surplus suggests that YBS International Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, YBS International Berhad has virtually no net debt, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that YBS International Berhad's EBIT was down 88% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since YBS International Berhad 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, YBS International Berhad 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.

Our View

We weren't impressed with YBS International Berhad's interest cover, and its EBIT growth rate made us cautious. But like a ballerina ending on a perfect pirouette, it has not trouble converting EBIT to free cash flow. When we consider all the elements mentioned above, it seems to us that YBS International Berhad is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Be aware that YBS International Berhad is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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