Is Yellow Balloon Tour (KOSDAQ:104620) A Risky Investment?

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 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yellow Balloon Tour

How Much Debt Does Yellow Balloon Tour Carry?

As you can see below, at the end of September 2020, Yellow Balloon Tour had ₩20.4b of debt, up from ₩14.3b a year ago. Click the image for more detail. 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

Zooming in on the latest balance sheet data, we can see that Yellow Balloon Tour had liabilities of ₩25.5b due within 12 months and liabilities of ₩809.3m due beyond that. On the other hand, it had cash of ₩27.3b and ₩1.78b worth of receivables due within a year. 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. Simply put, the fact that Yellow Balloon Tour has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yellow Balloon Tour's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Yellow Balloon Tour made a loss at the EBIT level, and saw its revenue drop to ₩34b, which is a fall of 50%. 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 in the last year Yellow Balloon Tour had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩17b of cash and made a loss of ₩4.4b. Given it only has net cash of ₩6.93b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Yellow Balloon Tour (including 1 which is is potentially serious) .

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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