Is Ying Han Technology (TPE:4562) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Ying Han Technology Co., Ltd. (TPE:4562) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ying Han Technology

What Is Ying Han Technology's Debt?

As you can see below, Ying Han Technology had NT$1.41b of debt at September 2020, down from NT$1.59b a year prior. However, because it has a cash reserve of NT$207.9m, its net debt is less, at about NT$1.20b.

A Look At Ying Han Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Ying Han Technology had liabilities of NT$1.21b due within 12 months and liabilities of NT$547.7m due beyond that. On the other hand, it had cash of NT$207.9m and NT$435.0m worth of receivables due within a year. So its liabilities total NT$1.11b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$1.62b, so it does suggest shareholders should keep an eye on Ying Han Technology's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ying Han Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Ying Han Technology had a loss before interest and tax, and actually shrunk its revenue by 34%, to NT$721m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ying Han Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$123m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$160m into a profit. So in short it's a really risky stock. 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 instance, we've identified 4 warning signs for Ying Han Technology (2 don't sit too well with us) 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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