Is Young Poong (KRX:000670) Using Too Much Debt?

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.' 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. Importantly, Young Poong Corporation (KRX:000670) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Young Poong

What Is Young Poong's Net Debt?

As you can see below, at the end of September 2020, Young Poong had ₩298.2b of debt, up from ₩269.0b a year ago. Click the image for more detail. However, it does have ₩642.2b in cash offsetting this, leading to net cash of ₩344.0b.

How Healthy Is Young Poong's Balance Sheet?

We can see from the most recent balance sheet that Young Poong had liabilities of ₩782.6b falling due within a year, and liabilities of ₩478.7b due beyond that. Offsetting this, it had ₩642.2b in cash and ₩458.1b in receivables that were due within 12 months. So its liabilities total ₩161.0b more than the combination of its cash and short-term receivables.

Given Young Poong has a market capitalization of ₩894.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Young Poong boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Young Poong grew its EBIT by 145% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Young Poong 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Young Poong has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Young Poong actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Young Poong does have more liabilities than liquid assets, it also has net cash of ₩344.0b. The cherry on top was that in converted 181% of that EBIT to free cash flow, bringing in ₩186b. So is Young Poong's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Young Poong, you may well want to click here to check an interactive graph of its earnings per share history.

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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