Here's Why YoungQin International (GTSM:2755) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that YoungQin International Co., Ltd. (GTSM:2755) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for YoungQin International

How Much Debt Does YoungQin International Carry?

The image below, which you can click on for greater detail, shows that YoungQin International had debt of NT$240.6m at the end of September 2020, a reduction from NT$251.3m over a year. However, its balance sheet shows it holds NT$254.8m in cash, so it actually has NT$14.3m net cash.

A Look At YoungQin International's Liabilities

According to the last reported balance sheet, YoungQin International had liabilities of NT$323.1m due within 12 months, and liabilities of NT$375.8m due beyond 12 months. Offsetting this, it had NT$254.8m in cash and NT$21.7m in receivables that were due within 12 months. So it has liabilities totalling NT$422.3m more than its cash and near-term receivables, combined.

YoungQin International has a market capitalization of NT$1.09b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, YoungQin International boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, YoungQin International grew its EBIT by 6.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is YoungQin International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While YoungQin International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, YoungQin International recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although YoungQin International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$14.3m. And it also grew its EBIT by 6.4% over the last year. So we don't have any problem with YoungQin International's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for YoungQin International you should know about.

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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