Is YKGI Holdings Berhad (KLSE:YKGI) Using Too Much Debt?

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.' 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 YKGI Holdings Berhad (KLSE:YKGI) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YKGI Holdings Berhad

What Is YKGI Holdings Berhad's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 YKGI Holdings Berhad had debt of RM94.3m, up from RM81.6m in one year. However, it also had RM25.3m in cash, and so its net debt is RM69.1m.

How Healthy Is YKGI Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that YKGI Holdings Berhad had liabilities of RM126.4m due within a year, and liabilities of RM28.5m falling due after that. Offsetting these obligations, it had cash of RM25.3m as well as receivables valued at RM57.1m due within 12 months. So its liabilities total RM72.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's RM65.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is YKGI Holdings Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year YKGI Holdings Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to RM277m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months YKGI Holdings Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM78k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of RM5.9m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with YKGI Holdings Berhad (including 1 which is a bit concerning) .

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.