Is ShinyoungwacoalInc (KRX:005800) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shinyoungwacoal,Inc. (KRX:005800) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 ShinyoungwacoalInc

What Is ShinyoungwacoalInc's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ShinyoungwacoalInc had ₩20.9b of debt, an increase on ₩1.04b, over one year. But on the other hand it also has ₩109.7b in cash, leading to a ₩88.8b net cash position.

A Look At ShinyoungwacoalInc's Liabilities

Zooming in on the latest balance sheet data, we can see that ShinyoungwacoalInc had liabilities of ₩41.5b due within 12 months and liabilities of ₩9.27b due beyond that. Offsetting this, it had ₩109.7b in cash and ₩15.0b in receivables that were due within 12 months. So it actually has ₩73.9b more liquid assets than total liabilities.

This surplus strongly suggests that ShinyoungwacoalInc has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, ShinyoungwacoalInc boasts net cash, so it's fair to say it does not have a heavy debt load!

Although ShinyoungwacoalInc made a loss at the EBIT level, last year, it was also good to see that it generated ₩4.7b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ShinyoungwacoalInc will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ShinyoungwacoalInc 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. During the last year, ShinyoungwacoalInc produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ShinyoungwacoalInc has net cash of ₩88.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in ₩3.6b. So we don't think ShinyoungwacoalInc's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with ShinyoungwacoalInc (including 1 which doesn't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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