Yoma Strategic Holdings (SGX:Z59) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Yoma Strategic Holdings Ltd. (SGX:Z59) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yoma Strategic Holdings

What Is Yoma Strategic Holdings's Debt?

As you can see below, Yoma Strategic Holdings had US$368.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$46.4m in cash leading to net debt of about US$321.6m.

How Healthy Is Yoma Strategic Holdings's Balance Sheet?

The latest balance sheet data shows that Yoma Strategic Holdings had liabilities of US$174.2m due within a year, and liabilities of US$375.5m falling due after that. Offsetting this, it had US$46.4m in cash and US$114.3m in receivables that were due within 12 months. So its liabilities total US$389.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$467.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yoma Strategic Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Yoma Strategic Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.6%, to US$96m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Yoma Strategic Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$23m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$20m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Take risks, for example - Yoma Strategic Holdings has 1 warning sign we think you should be aware of.

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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