Is Yellow Balloon Tour (KOSDAQ:104620) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Yellow Balloon Tour Co., Ltd. (KOSDAQ:104620) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 2024 Yellow Balloon Tour had debt of ₩33.6b, up from ₩22.8b in one year. But on the other hand it also has ₩53.5b in cash, leading to a ₩19.8b net cash position.

How Healthy Is Yellow Balloon Tour's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yellow Balloon Tour had liabilities of ₩96.9b due within 12 months and liabilities of ₩4.03b due beyond that. Offsetting this, it had ₩53.5b in cash and ₩17.1b in receivables that were due within 12 months. So it has liabilities totalling ₩30.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Yellow Balloon Tour has a market capitalization of ₩78.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Yellow Balloon Tour also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Yellow Balloon Tour wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to ₩131b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Yellow Balloon Tour?

While Yellow Balloon Tour lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩9.3b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Yellow Balloon Tour shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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 be aware of the 2 warning signs we've spotted with Yellow Balloon Tour .

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.