Chinyang Poly UrethaneLtd (KRX:010640) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Chinyang Poly Urethane Co.,Ltd (KRX:010640) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chinyang Poly UrethaneLtd

What Is Chinyang Poly UrethaneLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Chinyang Poly UrethaneLtd had debt of ₩9.97b, up from ₩6.09b in one year. However, because it has a cash reserve of ₩1.28b, its net debt is less, at about ₩8.69b.

How Healthy Is Chinyang Poly UrethaneLtd's Balance Sheet?

We can see from the most recent balance sheet that Chinyang Poly UrethaneLtd had liabilities of ₩9.21b falling due within a year, and liabilities of ₩10.3b due beyond that. On the other hand, it had cash of ₩1.28b and ₩7.42b worth of receivables due within a year. So its liabilities total ₩10.8b more than the combination of its cash and short-term receivables.

Of course, Chinyang Poly UrethaneLtd has a market capitalization of ₩64.3b, 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 measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Chinyang Poly UrethaneLtd has a low net debt to EBITDA ratio of only 1.4. And its EBIT covers its interest expense a whopping 32.8 times over. So we're pretty relaxed about its super-conservative use of debt. Another good sign is that Chinyang Poly UrethaneLtd has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Chinyang Poly UrethaneLtd's earnings that will influence how the balance sheet holds up in the future. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Chinyang Poly UrethaneLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Chinyang Poly UrethaneLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! When we consider the range of factors above, it looks like Chinyang Poly UrethaneLtd is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Chinyang Poly UrethaneLtd (1 can't be ignored) 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.