Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Yulon Motor Company Ltd. (TPE:2201) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Yulon Motor
What Is Yulon Motor's Debt?
The chart below, which you can click on for greater detail, shows that Yulon Motor had NT$199.4b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of NT$32.1b, its net debt is less, at about NT$167.3b.
How Strong Is Yulon Motor's Balance Sheet?
According to the last reported balance sheet, Yulon Motor had liabilities of NT$208.3b due within 12 months, and liabilities of NT$34.4b due beyond 12 months. Offsetting these obligations, it had cash of NT$32.1b as well as receivables valued at NT$163.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$47.3b.
When you consider that this deficiency exceeds the company's NT$37.1b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yulon Motor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Yulon Motor had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to NT$82b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Yulon Motor produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$26b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of NT$20b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Yulon Motor 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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About TWSE:2201
Yulon Motor
Manufactures and markets automobiles and related parts in Taiwan, China, and the Philippines.
Solid track record average dividend payer.
