Health Check: How Prudently Does Yujin TechnologyLtd (KOSDAQ:240600) Use 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.' 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. We can see that Yujin Technology Co.,Ltd. (KOSDAQ:240600) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Yujin TechnologyLtd

What Is Yujin TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Yujin TechnologyLtd had debt of ₩13.4b at the end of September 2024, a reduction from ₩21.9b over a year. However, its balance sheet shows it holds ₩21.0b in cash, so it actually has ₩7.63b net cash.

How Strong Is Yujin TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Yujin TechnologyLtd had liabilities of ₩16.7b falling due within a year, and liabilities of ₩3.37b due beyond that. Offsetting these obligations, it had cash of ₩21.0b as well as receivables valued at ₩6.71b due within 12 months. So it actually has ₩7.66b more liquid assets than total liabilities.

This excess liquidity suggests that Yujin TechnologyLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Yujin TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yujin TechnologyLtd 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, Yujin TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to ₩35b, which is a fall of 32%. That makes us nervous, to say the least.

So How Risky Is Yujin TechnologyLtd?

While Yujin TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩376m. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Yujin TechnologyLtd you should be aware of, and 1 of them doesn't sit too well with us.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.