Is Yong Tai Berhad (KLSE:YONGTAI) Using Debt 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 note that Yong Tai Berhad (KLSE:YONGTAI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yong Tai Berhad

What Is Yong Tai Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that Yong Tai Berhad had RM195.2m of debt in March 2021, down from RM213.5m, one year before. However, it does have RM7.74m in cash offsetting this, leading to net debt of about RM187.4m.

A Look At Yong Tai Berhad's Liabilities

The latest balance sheet data shows that Yong Tai Berhad had liabilities of RM350.9m due within a year, and liabilities of RM179.9m falling due after that. Offsetting these obligations, it had cash of RM7.74m as well as receivables valued at RM172.2m due within 12 months. So its liabilities total RM350.8m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of RM283.2m, 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. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Yong Tai Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to RM78m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Yong Tai Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM14m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RM45m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should learn about the 5 warning signs we've spotted with Yong Tai Berhad (including 2 which don't sit too well with us) .

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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