Is Byucksan (KRX:007210) A Risky Investment?

Warren Buffett famously said, '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 can see that Byucksan Corporation (KRX:007210) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Byucksan

What Is Byucksan's Net Debt?

The chart below, which you can click on for greater detail, shows that Byucksan had ₩80.8b in debt in September 2020; about the same as the year before. 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?

According to the last reported balance sheet, Byucksan had liabilities of ₩150.8b due within 12 months, and liabilities of ₩32.8b due beyond 12 months. 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.

Since publicly traded Byucksan shares are worth a total of ₩138.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Byucksan boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Byucksan grew its EBIT by 2,059% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Byucksan 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 three years, Byucksan saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Byucksan's liabilities, but we can be reassured by the fact it has has net cash of ₩15.6b. And we liked the look of last year's 2,059% year-on-year EBIT growth. So we don't have any problem with Byucksan's use of debt. 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. For instance, we've identified 1 warning sign for Byucksan that 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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