Does Yusin Holding (TPE:4557) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Yusin Holding Corp. (TPE:4557) 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yusin Holding

How Much Debt Does Yusin Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yusin Holding had NT$258.3m of debt, an increase on NT$126.4m, over one year. However, it does have NT$541.5m in cash offsetting this, leading to net cash of NT$283.2m.

How Healthy Is Yusin Holding's Balance Sheet?

We can see from the most recent balance sheet that Yusin Holding had liabilities of NT$602.1m falling due within a year, and liabilities of NT$21.0m due beyond that. Offsetting this, it had NT$541.5m in cash and NT$596.4m in receivables that were due within 12 months. So it actually has NT$514.8m more liquid assets than total liabilities.

This excess liquidity suggests that Yusin Holding is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Yusin Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Yusin Holding if management cannot prevent a repeat of the 21% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yusin Holding'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. Yusin Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Yusin Holding produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yusin Holding has net cash of NT$283.2m, as well as more liquid assets than liabilities. So we don't have any problem with Yusin Holding's use of debt. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Yusin Holding (of which 1 is potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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