Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Yangjisa Co., Ltd. (KOSDAQ:030960) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Yangjisa
What Is Yangjisa's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Yangjisa had ₩13.6b of debt, an increase on ₩11.9b, over one year. But on the other hand it also has ₩15.6b in cash, leading to a ₩1.98b net cash position.
A Look At Yangjisa's Liabilities
Zooming in on the latest balance sheet data, we can see that Yangjisa had liabilities of ₩26.9b due within 12 months and liabilities of ₩596.7m due beyond that. Offsetting this, it had ₩15.6b in cash and ₩14.3b in receivables that were due within 12 months. So it actually has ₩2.34b more liquid assets than total liabilities.
This state of affairs indicates that Yangjisa's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩179.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Yangjisa has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Yangjisa if management cannot prevent a repeat of the 98% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yangjisa's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yangjisa 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, Yangjisa burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Yangjisa has ₩1.98b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Yangjisa's balance sheet. 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. Be aware that Yangjisa is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you’re looking to trade Yangjisa, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About KOSDAQ:A030960
Very low with weak fundamentals.
