Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Youngevity International, Inc. (NASDAQ:YGYI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Youngevity International’s Net Debt?
The chart below, which you can click on for greater detail, shows that Youngevity International had US$15.8m in debt in June 2019; about the same as the year before. However, it does have US$2.09m in cash offsetting this, leading to net debt of about US$13.7m.
How Healthy Is Youngevity International’s Balance Sheet?
According to the last reported balance sheet, Youngevity International had liabilities of US$60.7m due within 12 months, and liabilities of US$25.3m due beyond 12 months. Offsetting these obligations, it had cash of US$2.09m as well as receivables valued at US$42.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$41.7m.
This deficit isn’t so bad because Youngevity International is worth US$147.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Youngevity International’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Youngevity International wasn’t profitable at an EBIT level, but managed to grow its revenue by7.2%, to US$185m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Youngevity International had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping US$17m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$21m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Youngevity International I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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