Does YOUNGHWA TECH (KOSDAQ:265560) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies YOUNGHWA TECH Co., Ltd. (KOSDAQ:265560) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for YOUNGHWA TECH

How Much Debt Does YOUNGHWA TECH Carry?

As you can see below, at the end of September 2020, YOUNGHWA TECH had ₩5.62b of debt, up from ₩3.62b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩24.8b in cash, so it actually has ₩19.2b net cash.

A Look At YOUNGHWA TECH's Liabilities

According to the last reported balance sheet, YOUNGHWA TECH had liabilities of ₩8.81b due within 12 months, and liabilities of ₩1.64b due beyond 12 months. Offsetting these obligations, it had cash of ₩24.8b as well as receivables valued at ₩5.38b due within 12 months. So it can boast ₩19.7b more liquid assets than total liabilities.

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

Over 12 months, YOUNGHWA TECH made a loss at the EBIT level, and saw its revenue drop to ₩34b, which is a fall of 28%. That makes us nervous, to say the least.

So How Risky Is YOUNGHWA TECH?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that YOUNGHWA TECH had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩1.0b and booked a ₩3.1b accounting loss. With only ₩19.2b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for YOUNGHWA TECH (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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