Is Youngone (KRX:111770) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Youngone Corporation (KRX:111770) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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

How Much Debt Does Youngone Carry?

As you can see below, Youngone had ₩348.5b of debt at September 2020, down from ₩496.1b a year prior. However, it does have ₩633.9b in cash offsetting this, leading to net cash of ₩285.4b.

A Look At Youngone's Liabilities

According to the last reported balance sheet, Youngone had liabilities of ₩607.6b due within 12 months, and liabilities of ₩480.2b due beyond 12 months. Offsetting these obligations, it had cash of ₩633.9b as well as receivables valued at ₩544.1b due within 12 months. So it can boast ₩90.2b more liquid assets than total liabilities.

This surplus suggests that Youngone has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Youngone has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Youngone grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Youngone can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Youngone 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. Looking at the most recent three years, Youngone recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Youngone has ₩285.4b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 11% in the last twelve months. So is Youngone's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Youngone 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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