Is Young Optics (TWSE:3504) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Young Optics Inc. (TWSE:3504) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Young Optics

What Is Young Optics's Net Debt?

As you can see below, Young Optics had NT$332.9m of debt at September 2024, down from NT$524.7m a year prior. But it also has NT$902.1m in cash to offset that, meaning it has NT$569.2m net cash.

How Strong Is Young Optics' Balance Sheet?

The latest balance sheet data shows that Young Optics had liabilities of NT$1.07b due within a year, and liabilities of NT$449.5m falling due after that. On the other hand, it had cash of NT$902.1m and NT$564.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$57.4m.

Having regard to Young Optics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$7.53b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Young Optics 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 you can't view debt in total isolation; since Young Optics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Young Optics had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$2.6b. 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$46m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Young Optics has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.