Is YBM Net (KOSDAQ:057030) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 YBM Net, Inc. (KOSDAQ:057030) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for YBM Net

How Much Debt Does YBM Net Carry?

The chart below, which you can click on for greater detail, shows that YBM Net had ₩5.00b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds ₩31.0b in cash, so it actually has ₩26.0b net cash.

How Strong Is YBM Net's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YBM Net had liabilities of ₩22.8b due within 12 months and liabilities of ₩7.34b due beyond that. Offsetting this, it had ₩31.0b in cash and ₩5.99b in receivables that were due within 12 months. So it actually has ₩6.83b more liquid assets than total liabilities.

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

On the other hand, YBM Net's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since YBM Net will need earnings to service that debt. 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. YBM Net 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. Happily for any shareholders, YBM Net actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that YBM Net has net cash of ₩26.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩5.6b, being 255% of its EBIT. So we don't think YBM Net's use of debt is risky. 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. We've identified 4 warning signs with YBM Net , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.