Y.S.P. Southeast Asia Holding Berhad (KLSE:YSPSAH) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Y.S.P. Southeast Asia Holding Berhad (KLSE:YSPSAH) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Y.S.P. Southeast Asia Holding Berhad

How Much Debt Does Y.S.P. Southeast Asia Holding Berhad Carry?

As you can see below, at the end of June 2021, Y.S.P. Southeast Asia Holding Berhad had RM47.5m of debt, up from RM37.0m a year ago. Click the image for more detail. But it also has RM115.7m in cash to offset that, meaning it has RM68.1m net cash.

How Healthy Is Y.S.P. Southeast Asia Holding Berhad's Balance Sheet?

According to the last reported balance sheet, Y.S.P. Southeast Asia Holding Berhad had liabilities of RM81.6m due within 12 months, and liabilities of RM36.2m due beyond 12 months. Offsetting these obligations, it had cash of RM115.7m as well as receivables valued at RM77.6m due within 12 months. So it actually has RM75.5m more liquid assets than total liabilities.

This excess liquidity suggests that Y.S.P. Southeast Asia Holding Berhad is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Y.S.P. Southeast Asia Holding Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Y.S.P. Southeast Asia Holding Berhad if management cannot prevent a repeat of the 52% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Y.S.P. Southeast Asia Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Y.S.P. Southeast Asia Holding 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. During the last three years, Y.S.P. Southeast Asia Holding Berhad produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Y.S.P. Southeast Asia Holding Berhad has RM68.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Y.S.P. Southeast Asia Holding Berhad's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Y.S.P. Southeast Asia Holding Berhad (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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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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