Is Yujin Robot (KOSDAQ:056080) Using Debt In A Risky Way?

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.' 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. As with many other companies Yujin Robot Co., Ltd. (KOSDAQ:056080) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yujin Robot

What Is Yujin Robot's Debt?

As you can see below, Yujin Robot had ₩11.7b of debt at September 2020, down from ₩19.8b a year prior. But it also has ₩26.3b in cash to offset that, meaning it has ₩14.6b net cash.

How Strong Is Yujin Robot's Balance Sheet?

We can see from the most recent balance sheet that Yujin Robot had liabilities of ₩25.7b falling due within a year, and liabilities of ₩8.67b due beyond that. On the other hand, it had cash of ₩26.3b and ₩5.70b worth of receivables due within a year. So it has liabilities totalling ₩2.32b more than its cash and near-term receivables, combined.

Having regard to Yujin Robot's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩118.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Yujin Robot also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yujin Robot 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 Robot made a loss at the EBIT level, and saw its revenue drop to ₩66b, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Yujin Robot?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Yujin Robot had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩7.4b and booked a ₩20b accounting loss. However, it has net cash of ₩14.6b, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Yujin Robot (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.

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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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