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

Warren Buffett famously said, '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 Y.S.P. Southeast Asia Holding Berhad (KLSE:YSPSAH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

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

What Is Y.S.P. Southeast Asia Holding Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Y.S.P. Southeast Asia Holding Berhad had RM42.8m in debt in June 2024; about the same as the year before. However, it does have RM139.2m in cash offsetting this, leading to net cash of RM96.4m.

A Look At Y.S.P. Southeast Asia Holding Berhad's Liabilities

The latest balance sheet data shows that Y.S.P. Southeast Asia Holding Berhad had liabilities of RM89.6m due within a year, and liabilities of RM49.2m falling due after that. On the other hand, it had cash of RM139.2m and RM100.3m worth of receivables due within a year. So it actually has RM100.6m more liquid assets than total liabilities.

It's good to see that Y.S.P. Southeast Asia Holding Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Y.S.P. Southeast Asia Holding Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Y.S.P. Southeast Asia Holding Berhad saw its EBIT drop by 9.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. While Y.S.P. Southeast Asia Holding Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Y.S.P. Southeast Asia Holding Berhad produced sturdy free cash flow equating to 64% 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 RM96.4m in net cash and a decent-looking balance sheet. So we don't think Y.S.P. Southeast Asia Holding Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Y.S.P. Southeast Asia Holding 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.