Does Youngone Holdings (KRX:009970) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Youngone Holdings Co., Ltd. (KRX:009970) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Youngone Holdings

What Is Youngone Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Youngone Holdings had ₩353.4b of debt in September 2020, down from ₩525.1b, one year before. But on the other hand it also has ₩949.4b in cash, leading to a ₩596.0b net cash position.

How Strong Is Youngone Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Youngone Holdings had liabilities of ₩641.7b due within 12 months and liabilities of ₩503.5b due beyond that. Offsetting these obligations, it had cash of ₩949.4b as well as receivables valued at ₩528.8b due within 12 months. So it can boast ₩333.0b more liquid assets than total liabilities.

This surplus strongly suggests that Youngone Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Youngone Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Youngone Holdings has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Youngone Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Youngone Holdings 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. Over the most recent three years, Youngone Holdings recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Youngone Holdings has net cash of ₩596.0b, as well as more liquid assets than liabilities. So is Youngone Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Youngone Holdings's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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