Is Yong Tai Berhad (KLSE: YONGTAI) weighed down by his debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that Yong Tai Berhad (KLSE: YONGTAI) uses debt in his business. But does this debt worry shareholders?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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 review for Yong Tai Berhad
What is Yong Tai Berhad’s debt?
As you can see below, Yong Tai Berhad had a debt of RM193.2 million in March 2022, about the same as the previous year. You can click on the graph for more details. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is Yong Tai Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Yong Tai Berhad had liabilities of RM349.0 million due within 12 months and liabilities of RM149.5 million due beyond. In return, he had RM478.0k in cash and RM109.6m in receivables due within 12 months. It therefore has liabilities totaling RM388.4 million more than its cash and short-term receivables, combined.
This deficit casts a shadow over the RM125.4m company, like a towering colossus of mere mortals. So we definitely think shareholders need to watch this one closely. After all, Yong Tai Berhad would likely need a major recapitalization if it were to pay its creditors today. When analyzing debt levels, the balance sheet is the obvious starting point. But it is Yong Tai Berhad’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, Yong Tai Berhad recorded a loss in EBIT and saw its revenue drop to RM57 million, a decline of 27%. To be honest, that doesn’t bode well.
Not only has Yong Tai Berhad’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost a very considerable RM15 million in EBIT. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. That said, it is possible that the company will change course. Still, we wouldn’t bet on it considering he’s vaped RM11m in cash in the last twelve months and doesn’t have much cash. We therefore consider this to be a high-risk action and would not be at all surprised if the company were to ask shareholders for money before long. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 5 warning signs for Yong Tai Berhad (2 cannot be ignored!) that you should be aware of before investing here.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.