Does Youngbo Chemical (KRX:014440) Have A Healthy Balance Sheet?

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. We note that Youngbo Chemical Co., Ltd. (KRX:014440) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Youngbo Chemical

What Is Youngbo Chemical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Youngbo Chemical had ₩13.2b of debt, an increase on ₩10.6b, over one year. However, it does have ₩32.3b in cash offsetting this, leading to net cash of ₩19.1b.

A Look At Youngbo Chemical's Liabilities

The latest balance sheet data shows that Youngbo Chemical had liabilities of ₩30.7b due within a year, and liabilities of ₩2.02b falling due after that. Offsetting these obligations, it had cash of ₩32.3b as well as receivables valued at ₩25.5b due within 12 months. So it actually has ₩25.0b more liquid assets than total liabilities.

This surplus liquidity suggests that Youngbo Chemical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Youngbo Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Youngbo Chemical if management cannot prevent a repeat of the 49% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Youngbo Chemical'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. Youngbo Chemical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Youngbo Chemical created free cash flow amounting to 7.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Youngbo Chemical has ₩19.1b in net cash and a decent-looking balance sheet. So we don't have any problem with Youngbo Chemical's use of debt. 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 example, we've discovered 4 warning signs for Youngbo Chemical (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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