Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Youngtek Electronics Corporation (GTSM:6261) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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 Youngtek Electronics
How Much Debt Does Youngtek Electronics Carry?
The image below, which you can click on for greater detail, shows that Youngtek Electronics had debt of NT$427.2m at the end of December 2020, a reduction from NT$449.7m over a year. But on the other hand it also has NT$2.36b in cash, leading to a NT$1.94b net cash position.
A Look At Youngtek Electronics' Liabilities
The latest balance sheet data shows that Youngtek Electronics had liabilities of NT$1.58b due within a year, and liabilities of NT$116.2m falling due after that. Offsetting these obligations, it had cash of NT$2.36b as well as receivables valued at NT$1.18b due within 12 months. So it actually has NT$1.85b more liquid assets than total liabilities.
It's good to see that Youngtek Electronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Youngtek Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Youngtek Electronics has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Youngtek Electronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Youngtek Electronics actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While it is always sensible to investigate a company's debt, in this case Youngtek Electronics has NT$1.94b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -NT$42m, being 108% of its EBIT. 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. Case in point: We've spotted 1 warning sign for Youngtek Electronics you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About TPEX:6261
Flawless balance sheet with solid track record and pays a dividend.
