Does Yoong Onn Corporation Berhad (KLSE:YOCB) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Yoong Onn Corporation Berhad (KLSE:YOCB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 Yoong Onn Corporation Berhad

How Much Debt Does Yoong Onn Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Yoong Onn Corporation Berhad had RM7.78m of debt, an increase on RM3.48m, over one year. But it also has RM103.9m in cash to offset that, meaning it has RM96.1m net cash.

A Look At Yoong Onn Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Yoong Onn Corporation Berhad had liabilities of RM19.4m falling due within a year, and liabilities of RM4.36m due beyond that. On the other hand, it had cash of RM103.9m and RM26.6m worth of receivables due within a year. So it can boast RM106.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Yoong Onn Corporation Berhad's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Yoong Onn Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Yoong Onn Corporation Berhad grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yoong Onn Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Yoong Onn Corporation 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. Happily for any shareholders, Yoong Onn Corporation Berhad actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Yoong Onn Corporation Berhad has RM96.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RM24m, being 150% of its EBIT. The bottom line is that Yoong Onn Corporation Berhad's use of debt is absolutely fine. 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 3 warning signs for Yoong Onn Corporation Berhad (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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