Is Kuk Young G&M (KOSDAQ:006050) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kuk Young G&M Co., Ltd. (KOSDAQ:006050) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kuk Young G&M

How Much Debt Does Kuk Young G&M Carry?

As you can see below, at the end of September 2020, Kuk Young G&M had ₩6.04b of debt, up from ₩2.96b a year ago. Click the image for more detail. However, it does have ₩16.6b in cash offsetting this, leading to net cash of ₩10.6b.

A Look At Kuk Young G&M's Liabilities

We can see from the most recent balance sheet that Kuk Young G&M had liabilities of ₩12.4b falling due within a year, and liabilities of ₩4.13b due beyond that. On the other hand, it had cash of ₩16.6b and ₩12.0b worth of receivables due within a year. So it actually has ₩12.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Kuk Young G&M could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kuk Young G&M 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 Kuk Young G&M will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Kuk Young G&M reported revenue of ₩71b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Kuk Young G&M?

While Kuk Young G&M lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩5.2b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Kuk Young G&M you should be aware of.

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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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.
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