These 4 Measures Indicate That Yong Tai Berhad (KLSE:YONGTAI) Is Using Debt In A Risky Way

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Yong Tai Berhad (KLSE:YONGTAI) makes use of debt. But the real question is whether this debt is making the company risky.

We've discovered 3 warning signs about Yong Tai Berhad. View them for free.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Yong Tai Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Yong Tai Berhad had RM196.9m of debt, an increase on RM180.0m, over one year. On the flip side, it has RM9.13m in cash leading to net debt of about RM187.8m.

A Look At Yong Tai Berhad's Liabilities

We can see from the most recent balance sheet that Yong Tai Berhad had liabilities of RM360.0m falling due within a year, and liabilities of RM47.5m due beyond that. On the other hand, it had cash of RM9.13m and RM33.7m worth of receivables due within a year. So its liabilities total RM364.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM94.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Yong Tai Berhad would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Yong Tai Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.96 times and a disturbingly high net debt to EBITDA ratio of 7.5 hit our confidence in Yong Tai Berhad like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Yong Tai Berhad is that it turned last year's EBIT loss into a gain of RM17m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yong Tai 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 the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Yong Tai Berhad saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Yong Tai Berhad's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. We think the chances that Yong Tai Berhad has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. For instance, we've identified 3 warning signs for Yong Tai Berhad (2 shouldn't be ignored) you should be aware of.

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.