Is Yoosung Enterprise (KRX:002920) Using Debt Sensibly?

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.' 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. Importantly, Yoosung Enterprise Co., Ltd. (KRX:002920) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yoosung Enterprise

What Is Yoosung Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Yoosung Enterprise had debt of ₩11.4b, up from none in one year. But on the other hand it also has ₩108.1b in cash, leading to a ₩96.7b net cash position.

A Look At Yoosung Enterprise's Liabilities

We can see from the most recent balance sheet that Yoosung Enterprise had liabilities of ₩72.5b falling due within a year, and liabilities of ₩43.7b due beyond that. On the other hand, it had cash of ₩108.1b and ₩43.9b worth of receivables due within a year. So it can boast ₩35.8b more liquid assets than total liabilities.

This luscious liquidity implies that Yoosung Enterprise's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Yoosung Enterprise has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Yoosung Enterprise's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Yoosung Enterprise had a loss before interest and tax, and actually shrunk its revenue by 6.9%, to ₩242b. We would much prefer see growth.

So How Risky Is Yoosung Enterprise?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Yoosung Enterprise lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩7.6b of cash and made a loss of ₩4.7b. With only ₩96.7b 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. Be aware that Yoosung Enterprise is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

If you’re looking to trade Yoosung Enterprise, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.