Is Yusin Holding (TWSE:4557) Using Too Much Debt?

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 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. Importantly, Yusin Holding Corp. (TWSE:4557) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yusin Holding

What Is Yusin Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Yusin Holding had NT$913.2m of debt, an increase on NT$768.5m, over one year. But on the other hand it also has NT$1.06b in cash, leading to a NT$148.7m net cash position.

A Look At Yusin Holding's Liabilities

We can see from the most recent balance sheet that Yusin Holding had liabilities of NT$2.05b falling due within a year, and liabilities of NT$76.9m due beyond that. On the other hand, it had cash of NT$1.06b and NT$1.49b worth of receivables due within a year. So it actually has NT$432.6m more liquid assets than total liabilities.

This surplus suggests that Yusin Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yusin Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Yusin Holding's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Yusin Holding 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. 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 53% 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$148.7m, as well as more liquid assets than liabilities. So we don't have any problem with Yusin Holding's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Yusin Holding has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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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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.