Young Poong Paper MfgLtd (KRX:006740) Takes On Some Risk With Its Use Of Debt

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.' 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. Importantly, Young Poong Paper Mfg Co.,Ltd. (KRX:006740) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Young Poong Paper MfgLtd

What Is Young Poong Paper MfgLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Young Poong Paper MfgLtd had ₩57.5b of debt, an increase on ₩6.10b, over one year. On the flip side, it has ₩47.6b in cash leading to net debt of about ₩9.91b.

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

The latest balance sheet data shows that Young Poong Paper MfgLtd had liabilities of ₩17.5b due within a year, and liabilities of ₩58.1b falling due after that. Offsetting these obligations, it had cash of ₩47.6b as well as receivables valued at ₩17.9b due within 12 months. So it has liabilities totalling ₩10.1b more than its cash and near-term receivables, combined.

Of course, Young Poong Paper MfgLtd has a market capitalization of ₩126.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Young Poong Paper MfgLtd has net debt of just 0.68 times EBITDA, suggesting it could ramp leverage without breaking a sweat. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. But the other side of the story is that Young Poong Paper MfgLtd saw its EBIT decline by 7.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Young Poong Paper MfgLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Young Poong Paper MfgLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Young Poong Paper MfgLtd's conversion of EBIT to free cash flow and EBIT growth rate definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that Young Poong Paper MfgLtd is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Young Poong Paper MfgLtd (of which 3 shouldn't be ignored!) you should know about.

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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