These 4 Measures Indicate That Chin Yang Industry (KRX:003780) Is Using Debt Safely

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.' 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. We can see that Chin Yang Industry Co., Ltd. (KRX:003780) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Chin Yang Industry

What Is Chin Yang Industry's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Chin Yang Industry had debt of ₩11.4b, up from ₩2.52b in one year. However, its balance sheet shows it holds ₩13.6b in cash, so it actually has ₩2.26b net cash.

How Healthy Is Chin Yang Industry's Balance Sheet?

The latest balance sheet data shows that Chin Yang Industry had liabilities of ₩18.9b due within a year, and liabilities of ₩7.78b falling due after that. Offsetting these obligations, it had cash of ₩13.6b as well as receivables valued at ₩14.0b due within 12 months. So it actually has ₩938.9m more liquid assets than total liabilities.

Having regard to Chin Yang Industry's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩55.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Chin Yang Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Chin Yang Industry grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chin Yang Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chin Yang Industry 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. During the last three years, Chin Yang Industry generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Chin Yang Industry has net cash of ₩2.26b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩10.0b, being 93% of its EBIT. So we don't think Chin Yang Industry's use of debt is risky. 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. Be aware that Chin Yang Industry is showing 2 warning signs in our investment analysis , you should know about...

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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