We Think YoungQin International (GTSM:2755) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 YoungQin International Co., Ltd. (GTSM:2755) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for YoungQin International

How Much Debt Does YoungQin International Carry?

As you can see below, YoungQin International had NT$155.5m of debt at December 2020, down from NT$251.3m a year prior. But on the other hand it also has NT$343.1m in cash, leading to a NT$187.7m net cash position.

How Strong Is YoungQin International's Balance Sheet?

We can see from the most recent balance sheet that YoungQin International had liabilities of NT$317.1m falling due within a year, and liabilities of NT$296.3m due beyond that. Offsetting these obligations, it had cash of NT$343.1m as well as receivables valued at NT$23.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$246.7m.

While this might seem like a lot, it is not so bad since YoungQin International has a market capitalization of NT$1.18b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, YoungQin International also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that YoungQin International grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. YoungQin International 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, YoungQin International produced sturdy free cash flow equating to 78% 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 YoungQin International does have more liabilities than liquid assets, it also has net cash of NT$187.7m. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in NT$144m. So we don't think YoungQin International's use of debt is risky. 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. Be aware that YoungQin International is showing 2 warning signs in our investment analysis , 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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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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