Is Yieh Hsing Enterprise (TWSE:2007) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Yieh Hsing Enterprise Co., Ltd. (TWSE:2007) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yieh Hsing Enterprise

What Is Yieh Hsing Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Yieh Hsing Enterprise had debt of NT$6.33b, up from NT$4.95b in one year. However, it also had NT$435.8m in cash, and so its net debt is NT$5.89b.

A Look At Yieh Hsing Enterprise's Liabilities

According to the last reported balance sheet, Yieh Hsing Enterprise had liabilities of NT$3.09b due within 12 months, and liabilities of NT$3.93b due beyond 12 months. On the other hand, it had cash of NT$435.8m and NT$214.1m worth of receivables due within a year. So it has liabilities totalling NT$6.37b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's NT$5.41b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Yieh Hsing 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.

Over 12 months, Yieh Hsing Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$5.1b, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Yieh Hsing Enterprise's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$731m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through NT$1.4b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Yieh Hsing Enterprise .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.