Is Yong Yi International Group (TWSE:2939) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Yong Yi International Group Co., Ltd (TWSE:2939) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Yong Yi International Group

What Is Yong Yi International Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Yong Yi International Group had NT$118.2m of debt, an increase on none, over one year. But it also has NT$809.6m in cash to offset that, meaning it has NT$691.4m net cash.

How Healthy Is Yong Yi International Group's Balance Sheet?

According to the last reported balance sheet, Yong Yi International Group had liabilities of NT$46.6m due within 12 months, and liabilities of NT$134.4m due beyond 12 months. Offsetting this, it had NT$809.6m in cash and NT$36.2m in receivables that were due within 12 months. So it actually has NT$664.8m more liquid assets than total liabilities.

This luscious liquidity implies that Yong Yi International Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Yong Yi International Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Yong Yi International Group'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, Yong Yi International Group made a loss at the EBIT level, and saw its revenue drop to NT$371m, which is a fall of 49%. That makes us nervous, to say the least.

So How Risky Is Yong Yi International Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Yong Yi International Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$26m and booked a NT$34m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$691.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Yong Yi International Group you should be aware of, and 1 of them is a bit unpleasant.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com