Is Yong Tai Berhad (KLSE:YONGTAI) Weighed On By Its Debt Load?

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.' 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 note that Yong Tai Berhad (KLSE:YONGTAI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

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 RM195.9m of debt in September 2021, down from RM209.6m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Yong Tai Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yong Tai Berhad had liabilities of RM331.5m due within 12 months and liabilities of RM149.3m due beyond that. Offsetting these obligations, it had cash of RM2.18m as well as receivables valued at RM121.7m due within 12 months. So its liabilities total RM357.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM155.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 34%, to RM76m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Yong Tai Berhad managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost RM2.8m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM61m over the last twelve months. 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. We've identified 4 warning signs with Yong Tai Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.