Here's Why YX Precious Metals Bhd (KLSE:YXPM) Can Manage Its Debt Responsibly
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.' 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. Importantly, YX Precious Metals Bhd (KLSE:YXPM) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is YX Precious Metals Bhd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2024 YX Precious Metals Bhd had RM9.60m of debt, an increase on none, over one year. However, it does have RM9.36m in cash offsetting this, leading to net debt of about RM238.0k.
How Strong Is YX Precious Metals Bhd's Balance Sheet?
We can see from the most recent balance sheet that YX Precious Metals Bhd had liabilities of RM14.8m falling due within a year, and liabilities of RM947.0k due beyond that. Offsetting this, it had RM9.36m in cash and RM16.5m in receivables that were due within 12 months. So it actually has RM10.1m more liquid assets than total liabilities.
This short term liquidity is a sign that YX Precious Metals Bhd could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, YX Precious Metals Bhd has a very light debt load indeed.
View our latest analysis for YX Precious Metals Bhd
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
YX Precious Metals Bhd has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.02 and EBIT of 52.4 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. On the other hand, YX Precious Metals Bhd saw its EBIT drop by 8.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 YX Precious Metals Bhd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, YX Precious Metals Bhd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Our View
YX Precious Metals Bhd's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. When we consider all the elements mentioned above, it seems to us that YX Precious Metals Bhd is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with YX Precious Metals Bhd (at least 1 which is concerning) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.