Is Yieh United Steel (GTSM:9957) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Yieh United Steel Corp. (GTSM:9957) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yieh United Steel

What Is Yieh United Steel's Net Debt?

As you can see below, Yieh United Steel had NT$30.6b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has NT$1.15b in cash leading to net debt of about NT$29.4b.

How Healthy Is Yieh United Steel's Balance Sheet?

The latest balance sheet data shows that Yieh United Steel had liabilities of NT$21.9b due within a year, and liabilities of NT$15.3b falling due after that. On the other hand, it had cash of NT$1.15b and NT$4.17b worth of receivables due within a year. So it has liabilities totalling NT$31.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$16.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Yieh United Steel 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 it is Yieh United Steel'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.

Over 12 months, Yieh United Steel made a loss at the EBIT level, and saw its revenue drop to NT$41b, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did Yieh United Steel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$1.5b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through NT$379m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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 example, we've discovered 1 warning sign for Yieh United Steel that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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