Is Y.C.C. Parts Mfg (TWSE:1339) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Y.C.C. Parts Mfg. Co., Ltd. (TWSE:1339) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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.

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

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

As you can see below, Y.C.C. Parts Mfg had NT$615.8m of debt at December 2023, down from NT$997.8m a year prior. However, it does have NT$812.0m in cash offsetting this, leading to net cash of NT$196.2m.

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

Zooming in on the latest balance sheet data, we can see that Y.C.C. Parts Mfg had liabilities of NT$849.8m due within 12 months and liabilities of NT$526.9m due beyond that. On the other hand, it had cash of NT$812.0m and NT$547.2m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Y.C.C. Parts Mfg's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$5.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Y.C.C. Parts Mfg boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Y.C.C. Parts Mfg grew its EBIT by 123% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Y.C.C. Parts Mfg will need earnings to service that debt. 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. Y.C.C. Parts Mfg 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, Y.C.C. Parts Mfg generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Y.C.C. Parts Mfg has NT$196.2m in net cash. And it impressed us with free cash flow of NT$326m, being 90% of its EBIT. So is Y.C.C. Parts Mfg's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Y.C.C. Parts Mfg's dividend history, without delay!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.