Is Yong Tai Berhad (KLSE:YONGTAI) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Yong Tai Berhad (KLSE:YONGTAI) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Yong Tai Berhad

What Is Yong Tai Berhad's Net Debt?

As you can see below, Yong Tai Berhad had RM209.6m of debt at September 2020, down from RM226.7m a year prior. However, it also had RM7.50m in cash, and so its net debt is RM202.1m.

How Healthy Is Yong Tai Berhad's Balance Sheet?

The latest balance sheet data shows that Yong Tai Berhad had liabilities of RM393.9m due within a year, and liabilities of RM137.4m falling due after that. Offsetting this, it had RM7.50m in cash and RM172.3m in receivables that were due within 12 months. So its liabilities total RM351.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM263.3m, we think shareholders really should watch Yong Tai Berhad's debt levels, like a parent watching their child ride a bike for the first time. 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 ultimately the future profitability of the business will decide if Yong Tai Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Yong Tai Berhad made a loss at the EBIT level, and saw its revenue drop to RM57m, which is a fall of 44%. To be frank that doesn't bode well.

Caveat Emptor

While Yong Tai Berhad's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RM32m. 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. Not least because it burned through RM12m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Yong Tai Berhad (of which 2 are a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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