Is Wing Yip Food (China) Holdings Group (KOSDAQ:900340) 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.' 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. We note that Wing Yip Food (China) Holdings Group Limited (KOSDAQ:900340) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 Wing Yip Food (China) Holdings Group

How Much Debt Does Wing Yip Food (China) Holdings Group Carry?

The image below, which you can click on for greater detail, shows that Wing Yip Food (China) Holdings Group had debt of ₩11.9b at the end of September 2020, a reduction from ₩19.0b over a year. But on the other hand it also has ₩100.3b in cash, leading to a ₩88.4b net cash position.

How Healthy Is Wing Yip Food (China) Holdings Group's Balance Sheet?

According to the last reported balance sheet, Wing Yip Food (China) Holdings Group had liabilities of ₩20.7b due within 12 months, and liabilities of ₩3.41b due beyond 12 months. Offsetting these obligations, it had cash of ₩100.3b as well as receivables valued at ₩10.6b due within 12 months. So it can boast ₩86.7b more liquid assets than total liabilities.

This luscious liquidity implies that Wing Yip Food (China) Holdings Group's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Wing Yip Food (China) Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Wing Yip Food (China) Holdings Group if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wing Yip Food (China) Holdings Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wing Yip Food (China) Holdings Group 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. Over the most recent three years, Wing Yip Food (China) Holdings Group recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Wing Yip Food (China) Holdings Group has ₩88.4b in net cash and a strong balance sheet. So we don't think Wing Yip Food (China) Holdings Group'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. Take risks, for example - Wing Yip Food (China) Holdings Group has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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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