Is Yieh Phui Enterprise (TPE:2023) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Yieh Phui Enterprise Co., Ltd. (TPE:2023) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 Phui Enterprise

What Is Yieh Phui Enterprise's Debt?

The chart below, which you can click on for greater detail, shows that Yieh Phui Enterprise had NT$50.2b in debt in September 2020; about the same as the year before. On the flip side, it has NT$4.00b in cash leading to net debt of about NT$46.2b.

A Look At Yieh Phui Enterprise's Liabilities

The latest balance sheet data shows that Yieh Phui Enterprise had liabilities of NT$24.9b due within a year, and liabilities of NT$30.1b falling due after that. Offsetting this, it had NT$4.00b in cash and NT$4.11b in receivables that were due within 12 months. So it has liabilities totalling NT$46.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$22.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Yieh Phui Enterprise would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Yieh Phui Enterprise shareholders face the double whammy of a high net debt to EBITDA ratio (22.6), and fairly weak interest coverage, since EBIT is just 0.34 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Yieh Phui Enterprise is that it turned last year's EBIT loss into a gain of NT$365m, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yieh Phui Enterprise'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. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Yieh Phui Enterprise saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Yieh Phui Enterprise's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. We think the chances that Yieh Phui Enterprise has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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 Yieh Phui Enterprise is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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