Is Young Optics (TPE:3504) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Young Optics Inc. (TPE:3504) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Young Optics

What Is Young Optics's Debt?

As you can see below, Young Optics had NT$961.6m of debt at December 2020, down from NT$1.01b a year prior. But on the other hand it also has NT$1.34b in cash, leading to a NT$374.1m net cash position.

A Look At Young Optics' Liabilities

The latest balance sheet data shows that Young Optics had liabilities of NT$1.35b due within a year, and liabilities of NT$986.2m falling due after that. Offsetting these obligations, it had cash of NT$1.34b as well as receivables valued at NT$604.9m due within 12 months. So it has liabilities totalling NT$393.7m more than its cash and near-term receivables, combined.

Given Young Optics has a market capitalization of NT$10.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Young Optics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Young Optics'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.

In the last year Young Optics had a loss before interest and tax, and actually shrunk its revenue by 19%, to NT$3.9b. That's not what we would hope to see.

So How Risky Is Young Optics?

While Young Optics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$128m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 2 warning signs for Young Optics (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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