Is Tongyang (KRX:001520) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tongyang Inc. (KRX:001520) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tongyang

How Much Debt Does Tongyang Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Tongyang had debt of ₩32.4b, up from ₩7.00b in one year. But on the other hand it also has ₩129.0b in cash, leading to a ₩96.6b net cash position.

How Healthy Is Tongyang's Balance Sheet?

We can see from the most recent balance sheet that Tongyang had liabilities of ₩173.1b falling due within a year, and liabilities of ₩39.1b due beyond that. Offsetting these obligations, it had cash of ₩129.0b as well as receivables valued at ₩136.7b due within 12 months. So it can boast ₩53.6b more liquid assets than total liabilities.

This surplus suggests that Tongyang is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Tongyang boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tongyang will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tongyang wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩598b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Tongyang?

While Tongyang lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩5.9b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Tongyang has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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