We Think Yusin Holding (TWSE:4557) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Yusin Holding Corp. (TWSE:4557) makes use of debt. 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Yusin Holding

How Much Debt Does Yusin Holding Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Yusin Holding had debt of NT$906.2m, up from NT$698.8m in one year. However, its balance sheet shows it holds NT$1.07b in cash, so it actually has NT$161.8m net cash.

How Healthy Is Yusin Holding's Balance Sheet?

The latest balance sheet data shows that Yusin Holding had liabilities of NT$1.68b due within a year, and liabilities of NT$68.7m falling due after that. Offsetting this, it had NT$1.07b in cash and NT$1.17b in receivables that were due within 12 months. So it can boast NT$491.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Yusin Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Yusin Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Yusin Holding saw its EBIT decline by 2.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yusin Holding has NT$161.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$453m, being 68% of its EBIT. So we don't think Yusin Holding's use of debt is risky. 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. We've identified 1 warning sign with Yusin Holding , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.