YMT (KOSDAQ:251370) Has A Pretty 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that YMT Co., Ltd. (KOSDAQ:251370) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for YMT

What Is YMT's Debt?

As you can see below, at the end of June 2020, YMT had ₩46.8b of debt, up from ₩41.9b a year ago. Click the image for more detail. But it also has ₩60.3b in cash to offset that, meaning it has ₩13.5b net cash.

How Strong Is YMT's Balance Sheet?

We can see from the most recent balance sheet that YMT had liabilities of ₩43.7b falling due within a year, and liabilities of ₩22.4b due beyond that. Offsetting this, it had ₩60.3b in cash and ₩24.4b in receivables that were due within 12 months. So it can boast ₩18.6b more liquid assets than total liabilities.

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

And we also note warmly that YMT grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if YMT can strengthen its balance sheet over time. 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. YMT 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. In the last three years, YMT's free cash flow amounted to 24% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that YMT has net cash of ₩13.5b, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't think YMT's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for YMT that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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