Is Youlchon ChemicalLtd (KRX:008730) A Risky Investment?

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.' 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. We can see that Youlchon Chemical Co.,Ltd. (KRX:008730) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Youlchon ChemicalLtd

How Much Debt Does Youlchon ChemicalLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Youlchon ChemicalLtd had debt of ₩245.5b, up from ₩227.9b in one year. On the flip side, it has ₩15.5b in cash leading to net debt of about ₩230.1b.

A Look At Youlchon ChemicalLtd's Liabilities

We can see from the most recent balance sheet that Youlchon ChemicalLtd had liabilities of ₩217.5b falling due within a year, and liabilities of ₩124.4b due beyond that. Offsetting these obligations, it had cash of ₩15.5b as well as receivables valued at ₩101.7b due within 12 months. So it has liabilities totalling ₩224.7b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Youlchon ChemicalLtd has a market capitalization of ₩579.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Youlchon ChemicalLtd 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.

In the last year Youlchon ChemicalLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to ₩444b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Youlchon ChemicalLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩14b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩66b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Youlchon ChemicalLtd that you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.