Is Byucksan (KRX:007210) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Byucksan Corporation (KRX:007210) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Byucksan

How Much Debt Does Byucksan Carry?

As you can see below, Byucksan had ₩80.8b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩96.3b in cash to offset that, meaning it has ₩15.6b net cash.

How Healthy Is Byucksan's Balance Sheet?

The latest balance sheet data shows that Byucksan had liabilities of ₩150.8b due within a year, and liabilities of ₩32.8b falling due after that. Offsetting these obligations, it had cash of ₩96.3b as well as receivables valued at ₩81.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩5.42b.

Of course, Byucksan has a market capitalization of ₩122.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Byucksan also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Byucksan grew its EBIT by 2,059% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Byucksan'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Byucksan may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Byucksan burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Byucksan has ₩15.6b in net cash. And it impressed us with its EBIT growth of 2,059% over the last year. So we are not troubled with Byucksan's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Byucksan has 1 warning sign we think you should be aware of.

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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