Yi Jinn Industrial (TPE:1457) Has Debt But No Earnings; Should You Worry?

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 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. As with many other companies Yi Jinn Industrial Co., Ltd. (TPE:1457) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Yi Jinn Industrial

What Is Yi Jinn Industrial's Debt?

As you can see below, Yi Jinn Industrial had NT$8.20b of debt at September 2020, down from NT$8.88b a year prior. However, because it has a cash reserve of NT$912.7m, its net debt is less, at about NT$7.28b.

How Healthy Is Yi Jinn Industrial's Balance Sheet?

According to the last reported balance sheet, Yi Jinn Industrial had liabilities of NT$1.75b due within 12 months, and liabilities of NT$7.23b due beyond 12 months. Offsetting this, it had NT$912.7m in cash and NT$459.3m in receivables that were due within 12 months. So it has liabilities totalling NT$7.60b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$3.48b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Yi Jinn Industrial would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yi Jinn Industrial will need earnings to service that debt. 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.

Over 12 months, Yi Jinn Industrial made a loss at the EBIT level, and saw its revenue drop to NT$2.7b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Yi Jinn Industrial's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$34m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$714m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Yi Jinn Industrial (1 is potentially serious) you should be aware of.

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. 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.
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