simplywall.st puts Yuen Chang Stainless Steel through its paces in a recent report.
The biggest investment risk is not price volatility
The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, doesn’t mince words when he says, “The biggest investment risk is not price volatility, but whether you will suffer a permanent loss of capital.
So it’s obvious that you need to consider debt when thinking about how risky a particular stock is, because too much debt can sink a company. It is important to note that Yuen Chang Stainless Steel Co, Ltd has debt. But is that debt a problem for shareholders?
Why is debt a risk?
Debt helps a company until the company has trouble paying it back, either with new capital or free cash flow. An integral part of capitalism is the process of “creative destruction,” in which failing companies are mercilessly liquidated by their bankers.
Although this is not too common, we often see indebted companies permanently dilute their shareholders as lenders force them to raise capital at a poor price.
However, by replacing dilution, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. When we think about a company’s use of debt, we first consider cash and debt together.
How healthy is Yuen Chang Stainless Steel’s balance sheet?
According to simplywall.st, the latest balance sheet data shows that Yuen Chang Stainless Steel has NT$3.60 billion in liabilities maturing within one year and NT$1.34 billion in liabilities maturing thereafter. These liabilities are offset by cash of NT$479.5 million and receivables of NT$791.8 million maturing within 12 months. Thus, liabilities exceed total cash and (current) receivables by NT$3.67 billion.
Simplywall.st further writes that this shortfall exceeds the company’s market capitalization of NT$2.60 billion. An indication that one should carefully examine the balance sheet. In the scenario where the company would need to quickly clean up its balance sheet, it is likely that shareholders would suffer from significant dilution.
In a conclusion, simplywall.st says, among other things, “In the end, it’s sometimes easier to focus on companies that don’t need debt in the first place.”
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