Does Yellow Balloon Tour (KOSDAQ:104620) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Yellow Balloon Tour Co., Ltd. (KOSDAQ:104620) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yellow Balloon Tour

What Is Yellow Balloon Tour's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Yellow Balloon Tour had debt of ₩20.4b, up from ₩14.3b in one year. But it also has ₩27.3b in cash to offset that, meaning it has ₩6.93b net cash.

A Look At Yellow Balloon Tour's Liabilities

We can see from the most recent balance sheet that Yellow Balloon Tour had liabilities of ₩25.5b falling due within a year, and liabilities of ₩809.3m due beyond that. Offsetting these obligations, it had cash of ₩27.3b as well as receivables valued at ₩1.78b due within 12 months. So it actually has ₩2.76b more liquid assets than total liabilities.

This surplus suggests that Yellow Balloon Tour has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yellow Balloon Tour boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Yellow Balloon Tour 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.

In the last year Yellow Balloon Tour had a loss before interest and tax, and actually shrunk its revenue by 50%, to ₩34b. That makes us nervous, to say the least.

So How Risky Is Yellow Balloon Tour?

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 Yellow Balloon Tour had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩17b of cash and made a loss of ₩4.4b. With only ₩6.93b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 2 warning signs we've spotted with Yellow Balloon Tour (including 1 which is concerning) .

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. 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.
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