These 4 Measures Indicate That Kuk Young G&M (KOSDAQ:006050) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Kuk Young G&M Co., Ltd. (KOSDAQ:006050) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See 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 June 2024, Kuk Young G&M had ₩10.0b of debt, up from ₩7.50b a year ago. Click the image for more detail. But it also has ₩19.1b in cash to offset that, meaning it has ₩9.12b net cash.

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 ₩21.2b due within 12 months and liabilities of ₩1.65b due beyond that. Offsetting these obligations, it had cash of ₩19.1b as well as receivables valued at ₩15.5b due within 12 months. So it can boast ₩11.8b more liquid assets than total liabilities.

It's good to see that Kuk Young G&M has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kuk Young G&M boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Kuk Young G&M if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Kuk Young G&M'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Kuk Young G&M has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Kuk Young G&M actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kuk Young G&M has net cash of ₩9.12b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩7.8b, being 264% of its EBIT. So we don't think Kuk Young G&M's use of debt is risky. 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. We've identified 3 warning signs with Kuk Young G&M , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.