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.' 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 Plus, Inc. (KRX:037270) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 YG Plus
How Much Debt Does YG Plus Carry?
As you can see below, YG Plus had ₩6.44b of debt at September 2020, down from ₩9.60b a year prior. But it also has ₩38.2b in cash to offset that, meaning it has ₩31.7b net cash.
How Strong Is YG Plus's Balance Sheet?
According to the last reported balance sheet, YG Plus had liabilities of ₩35.4b due within 12 months, and liabilities of ₩7.60b due beyond 12 months. Offsetting these obligations, it had cash of ₩38.2b as well as receivables valued at ₩14.3b due within 12 months. So it actually has ₩9.53b more liquid assets than total liabilities.
This short term liquidity is a sign that YG Plus could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that YG Plus has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is YG Plus'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.
Over 12 months, YG Plus made a loss at the EBIT level, and saw its revenue drop to ₩110b, which is a fall of 4.7%. We would much prefer see growth.
So How Risky Is YG Plus?
Although YG Plus had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩1.7b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that YG Plus is showing 2 warning signs 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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About KOSE:A037270
Flawless balance sheet and slightly overvalued.
