Youngone Holdings (KRX:009970) Seems To Use Debt Rather Sparingly

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. Importantly, Youngone Holdings Co., Ltd. (KRX:009970) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Youngone Holdings

What Is Youngone Holdings's Debt?

As you can see below, Youngone Holdings had ₩353.4b of debt at September 2020, down from ₩525.1b a year prior. However, it does have ₩949.4b in cash offsetting this, leading to net cash of ₩596.0b.

How Healthy Is Youngone Holdings' Balance Sheet?

The latest balance sheet data shows that Youngone Holdings had liabilities of ₩641.7b due within a year, and liabilities of ₩503.5b falling due after that. Offsetting this, it had ₩949.4b in cash and ₩528.8b in receivables that were due within 12 months. So it actually has ₩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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Youngone Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Youngone Holdings grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Youngone Holdings'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 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 cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Youngone Holdings has ₩596.0b in net cash and a decent-looking balance sheet. So is Youngone Holdings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Youngone Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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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