Here's Why Young Shine Electric (GTSM:2249) Can Manage Its Debt Responsibly

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 Young Shine Electric Co., Ltd. (GTSM:2249) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 Young Shine Electric

What Is Young Shine Electric's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Young Shine Electric had NT$57.0m of debt in June 2020, down from NT$256.7m, one year before. But it also has NT$139.4m in cash to offset that, meaning it has NT$82.4m net cash.

A Look At Young Shine Electric's Liabilities

According to the last reported balance sheet, Young Shine Electric had liabilities of NT$268.5m due within 12 months, and liabilities of NT$44.5m due beyond 12 months. On the other hand, it had cash of NT$139.4m and NT$245.2m worth of receivables due within a year. So it actually has NT$71.7m more liquid assets than total liabilities.

This surplus suggests that Young Shine Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Young Shine Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Young Shine Electric has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Young Shine Electric'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Young Shine Electric 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. Over the last three years, Young Shine Electric actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Young Shine Electric has net cash of NT$82.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$183m, being 105% of its EBIT. So we are not troubled with Young Shine Electric's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Young Shine Electric that 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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