Is Kuk Young G&M (KOSDAQ:006050) Using Too Much Debt?

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 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. We note that Kuk Young G&M Co., Ltd. (KOSDAQ:006050) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kuk Young G&M

What Is Kuk Young G&M's Net Debt?

As you can see below, at the end of December 2020, Kuk Young G&M had ₩7.50b of debt, up from ₩3.54b a year ago. Click the image for more detail. But on the other hand it also has ₩16.8b in cash, leading to a ₩9.27b net cash position.

How Healthy Is Kuk Young G&M's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kuk Young G&M had liabilities of ₩15.0b due within 12 months and liabilities of ₩3.98b due beyond that. Offsetting this, it had ₩16.8b in cash and ₩13.5b in receivables that were due within 12 months. So it can boast ₩11.3b 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. Simply put, the fact that Kuk Young G&M has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Kuk Young G&M had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩64b. We would much prefer see growth.

So How Risky Is Kuk Young G&M?

Although Kuk Young G&M had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩3.8b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Kuk Young G&M you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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