Is Young Optics (TWSE:3504) Using Too Much Debt?

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. Importantly, Young Optics Inc. (TWSE:3504) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Young Optics

What Is Young Optics's Debt?

The image below, which you can click on for greater detail, shows that Young Optics had debt of NT$345.2m at the end of March 2024, a reduction from NT$732.6m over a year. However, its balance sheet shows it holds NT$934.5m in cash, so it actually has NT$589.4m net cash.

How Strong Is Young Optics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Young Optics had liabilities of NT$968.4m due within 12 months and liabilities of NT$457.1m due beyond that. On the other hand, it had cash of NT$934.5m and NT$461.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$29.8m.

This state of affairs indicates that Young Optics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$7.31b 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! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Young Optics made a loss at the EBIT level, and saw its revenue drop to NT$2.8b, which is a fall of 33%. That makes us nervous, to say the least.

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$218m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example - Young Optics has 1 warning sign we think 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. 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.

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