Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Youngevity International, Inc. (NASDAQ:YGYI) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Youngevity International's Debt?
You can click the graphic below for the historical numbers, but it shows that Youngevity International had US$15.6m of debt in March 2019, down from US$17.4m, one year before. However, it does have US$2.54m in cash offsetting this, leading to net debt of about US$13.1m.
How Strong Is Youngevity International's Balance Sheet?
According to the last reported balance sheet, Youngevity International had liabilities of US$70.0m due within 12 months, and liabilities of US$25.4m due beyond 12 months. Offsetting these obligations, it had cash of US$2.54m as well as receivables valued at US$26.7m due within 12 months. So it has liabilities totalling US$66.1m more than its cash and near-term receivables, combined.
Youngevity International has a market capitalization of US$148.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Youngevity International reported revenue of US$176m, which is a gain of 3.4%. 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. Indeed, it lost a very considerable US$18m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$19m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.