Is ChinYang Chemical (KRX:051630) Using Debt Sensibly?

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. We note that ChinYang Chemical Corporation (KRX:051630) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, 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 ChinYang Chemical

What Is ChinYang Chemical's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 ChinYang Chemical had debt of ₩35.0b, up from ₩8.13b in one year. However, its balance sheet shows it holds ₩36.9b in cash, so it actually has ₩1.89b net cash.

How Strong Is ChinYang Chemical's Balance Sheet?

We can see from the most recent balance sheet that ChinYang Chemical had liabilities of ₩4.99b falling due within a year, and liabilities of ₩38.3b due beyond that. Offsetting these obligations, it had cash of ₩36.9b as well as receivables valued at ₩1.77b due within 12 months. So it has liabilities totalling ₩4.63b more than its cash and near-term receivables, combined.

Given ChinYang Chemical has a market capitalization of ₩85.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ChinYang Chemical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ChinYang Chemical 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, ChinYang Chemical made a loss at the EBIT level, and saw its revenue drop to ₩25b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is ChinYang Chemical?

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 ChinYang Chemical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩1.7b of cash and made a loss of ₩4.5b. While this does make the company a bit risky, it's important to remember it has net cash of ₩1.89b. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for ChinYang Chemical (3 can't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.