Is Young Poong Paper MfgLtd (KRX:006740) 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. Importantly, Young Poong Paper Mfg Co.,Ltd. (KRX:006740) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Young Poong Paper MfgLtd

How Much Debt Does Young Poong Paper MfgLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Young Poong Paper MfgLtd had ₩42.0b of debt, an increase on ₩6.69b, over one year. However, it does have ₩44.4b in cash offsetting this, leading to net cash of ₩2.34b.

How Healthy Is Young Poong Paper MfgLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Young Poong Paper MfgLtd had liabilities of ₩17.8b due within 12 months and liabilities of ₩37.5b due beyond that. Offsetting these obligations, it had cash of ₩44.4b as well as receivables valued at ₩17.8b due within 12 months. So it can boast ₩6.80b more liquid assets than total liabilities.

This surplus suggests that Young Poong Paper MfgLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Young Poong Paper MfgLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Young Poong Paper MfgLtd saw its EBIT drop by 7.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Young Poong Paper MfgLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Young Poong Paper MfgLtd 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 two years, Young Poong Paper MfgLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Young Poong Paper MfgLtd has ₩2.34b in net cash and a decent-looking balance sheet. So we don't have any problem with Young Poong Paper MfgLtd's use of debt. 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 4 warning signs for Young Poong Paper MfgLtd (2 shouldn't be ignored!) that you should be aware of before investing here.

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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