Is Youngtek Electronics (GTSM:6261) A Risky Investment?

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.' 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 Youngtek Electronics Corporation (GTSM:6261) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Youngtek Electronics

How Much Debt Does Youngtek Electronics Carry?

As you can see below, Youngtek Electronics had NT$436.5m of debt at September 2020, down from NT$465.6m a year prior. But it also has NT$2.62b in cash to offset that, meaning it has NT$2.18b net cash.

How Strong Is Youngtek Electronics' Balance Sheet?

The latest balance sheet data shows that Youngtek Electronics had liabilities of NT$1.52b due within a year, and liabilities of NT$70.3m falling due after that. Offsetting these obligations, it had cash of NT$2.62b as well as receivables valued at NT$1.06b due within 12 months. So it actually has NT$2.09b more liquid assets than total liabilities.

This surplus suggests that Youngtek Electronics is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Youngtek Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Youngtek Electronics grew its EBIT by 191% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Youngtek Electronics 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Youngtek Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Youngtek Electronics actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Youngtek Electronics has net cash of NT$2.18b, as well as more liquid assets than liabilities. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in NT$472m. When it comes to Youngtek Electronics's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. Take risks, for example - Youngtek Electronics has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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