Is Yeou Yih Steel (GTSM:9962) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Yeou Yih Steel Co., Ltd. (GTSM:9962) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yeou Yih Steel

How Much Debt Does Yeou Yih Steel Carry?

You can click the graphic below for the historical numbers, but it shows that Yeou Yih Steel had NT$101.4m of debt in December 2020, down from NT$247.0m, one year before. On the flip side, it has NT$101.2m in cash leading to net debt of about NT$272.0k.

A Look At Yeou Yih Steel's Liabilities

We can see from the most recent balance sheet that Yeou Yih Steel had liabilities of NT$165.1m falling due within a year, and liabilities of NT$13.9m due beyond that. On the other hand, it had cash of NT$101.2m and NT$123.5m worth of receivables due within a year. So it actually has NT$45.7m 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. Carrying virtually no net debt, Yeou Yih Steel has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yeou Yih Steel will need earnings to service that debt. 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.

In the last year Yeou Yih Steel had a loss before interest and tax, and actually shrunk its revenue by 12%, to NT$2.0b. We would much prefer see growth.

Caveat Emptor

While Yeou Yih Steel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$7.3m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of NT$175m and profit of NT$1.2m over the last year. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Yeou Yih Steel has 3 warning signs we think 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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