Does Y.C.C. Parts Mfg (TPE:1339) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Y.C.C. Parts Mfg. Co., Ltd. (TPE:1339) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Y.C.C. Parts Mfg

How Much Debt Does Y.C.C. Parts Mfg Carry?

You can click the graphic below for the historical numbers, but it shows that Y.C.C. Parts Mfg had NT$1.20b of debt in September 2020, down from NT$1.31b, one year before. However, because it has a cash reserve of NT$1.12b, its net debt is less, at about NT$80.7m.

How Strong Is Y.C.C. Parts Mfg's Balance Sheet?

The latest balance sheet data shows that Y.C.C. Parts Mfg had liabilities of NT$1.20b due within a year, and liabilities of NT$615.2m falling due after that. Offsetting these obligations, it had cash of NT$1.12b as well as receivables valued at NT$617.1m due within 12 months. So its liabilities total NT$76.0m more than the combination of its cash and short-term receivables.

Of course, Y.C.C. Parts Mfg has a market capitalization of NT$3.08b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Y.C.C. Parts Mfg's net debt is only 0.12 times its EBITDA. And its EBIT covers its interest expense a whopping 439 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Y.C.C. Parts Mfg's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Y.C.C. Parts Mfg'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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Y.C.C. Parts Mfg 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.

Our View

Y.C.C. Parts Mfg's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its EBIT growth rate has the opposite effect. Taking all this data into account, it seems to us that Y.C.C. Parts Mfg takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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 4 warning signs we've spotted with Y.C.C. Parts Mfg (including 1 which makes us a bit uncomfortable) .

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.

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