The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Yan Tat Group Holdings Limited (HKG:1480) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yan Tat Group Holdings

What Is Yan Tat Group Holdings's Net Debt?

As you can see below, Yan Tat Group Holdings had HK$84.2m of debt at December 2019, down from HK$178.5m a year prior. However, its balance sheet shows it holds HK$129.9m in cash, so it actually has HK$45.7m net cash.

A Look At Yan Tat Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Yan Tat Group Holdings had liabilities of HK$276.6m due within 12 months and liabilities of HK$35.7m due beyond that. On the other hand, it had cash of HK$129.9m and HK$216.4m worth of receivables due within a year. So it actually has HK$34.1m more liquid assets than total liabilities.

This surplus suggests that Yan Tat Group Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yan Tat Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Yan Tat Group Holdings's saving grace is its low debt levels, because its EBIT has tanked 28% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yan Tat Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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.