Would ChinYang Chemical (KRX:051630) Be Better Off With Less 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ChinYang Chemical Corporation (KRX:051630) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 ChinYang Chemical

How Much Debt Does ChinYang Chemical Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 ChinYang Chemical had ₩8.13b of debt, an increase on ₩392.9k, over one year. However, it also had ₩1.07b in cash, and so its net debt is ₩7.06b.

How Healthy Is ChinYang Chemical's Balance Sheet?

According to the last reported balance sheet, ChinYang Chemical had liabilities of ₩6.63b due within 12 months, and liabilities of ₩10.7b due beyond 12 months. Offsetting these obligations, it had cash of ₩1.07b as well as receivables valued at ₩2.77b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.5b.

While this might seem like a lot, it is not so bad since ChinYang Chemical has a market capitalization of ₩52.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is ChinYang Chemical'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.

In the last year ChinYang Chemical had a loss before interest and tax, and actually shrunk its revenue by 2.8%, to ₩28b. We would much prefer see growth.

Caveat Emptor

Importantly, ChinYang Chemical had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩2.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩13b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ChinYang Chemical (of which 1 doesn't sit too well with us!) you should know about.

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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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.