These 4 Measures Indicate That Yong Shun Chemical (GTSM:4711) Is Using Debt Safely

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. Importantly, Yong Shun Chemical Co., Ltd (GTSM:4711) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yong Shun Chemical

What Is Yong Shun Chemical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Yong Shun Chemical had NT$87.2m of debt in September 2020, down from NT$130.4m, one year before. However, it does have NT$498.5m in cash offsetting this, leading to net cash of NT$411.3m.

A Look At Yong Shun Chemical's Liabilities

The latest balance sheet data shows that Yong Shun Chemical had liabilities of NT$164.1m due within a year, and liabilities of NT$68.7m falling due after that. On the other hand, it had cash of NT$498.5m and NT$176.2m worth of receivables due within a year. So it can boast NT$442.0m more liquid assets than total liabilities.

This luscious liquidity implies that Yong Shun Chemical's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Yong Shun Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Yong Shun Chemical grew its EBIT by 112% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yong Shun Chemical 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Yong Shun Chemical 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. Happily for any shareholders, Yong Shun Chemical actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Yong Shun Chemical has net cash of NT$411.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 273% of that EBIT to free cash flow, bringing in NT$112m. At the end of the day we're not concerned about Yong Shun Chemical's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Yong Shun Chemical (1 is a bit concerning) 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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