Is YG Entertainment (KOSDAQ:122870) Using Debt In A Risky Way?

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that YG Entertainment Inc. (KOSDAQ:122870) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for YG Entertainment

What Is YG Entertainment's Debt?

As you can see below, YG Entertainment had ₩12.9b of debt at March 2020, down from ₩83.8b a year prior. But it also has ₩90.6b in cash to offset that, meaning it has ₩77.7b net cash.

KOSDAQ:A122870 Historical Debt July 4th 2020

A Look At YG Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that YG Entertainment had liabilities of ₩74.8b due within 12 months and liabilities of ₩18.2b due beyond that. Offsetting these obligations, it had cash of ₩90.6b as well as receivables valued at ₩34.0b due within 12 months. So it can boast ₩31.6b more liquid assets than total liabilities.

This short term liquidity is a sign that YG Entertainment could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that YG Entertainment has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if YG Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year YG Entertainment's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is YG Entertainment?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that YG Entertainment had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of ₩4.0b and booked a ₩22b accounting loss. Given it only has net cash of ₩77.7b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that YG Entertainment is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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