Health Check: How Prudently Does Yeou Yih Steel (GTSM:9962) Use Debt?

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.' 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, Yeou Yih Steel Co., Ltd. (GTSM:9962) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yeou Yih Steel

What Is Yeou Yih Steel's Debt?

As you can see below, Yeou Yih Steel had NT$83.7m of debt at September 2020, down from NT$166.7m a year prior. However, it does have NT$131.7m in cash offsetting this, leading to net cash of NT$48.1m.

How Healthy Is Yeou Yih Steel's Balance Sheet?

We can see from the most recent balance sheet that Yeou Yih Steel had liabilities of NT$109.9m falling due within a year, and liabilities of NT$13.9m due beyond that. Offsetting these obligations, it had cash of NT$131.7m as well as receivables valued at NT$54.9m due within 12 months. So it actually has NT$62.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Yeou Yih Steel could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Yeou Yih Steel has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yeou Yih Steel 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.

In the last year Yeou Yih Steel had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to NT$2.2b. We would much prefer see growth.

So How Risky Is Yeou Yih Steel?

Although Yeou Yih Steel had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$577k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Yeou Yih Steel has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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