Is TY Holdings (KRX:363280) Using Debt Sensibly?

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.' 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, TY Holdings Co., Ltd (KRX:363280) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TY Holdings

How Much Debt Does TY Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 TY Holdings had ₩733.1b of debt, an increase on ₩551.5b, over one year. On the flip side, it has ₩179.5b in cash leading to net debt of about ₩553.7b.

A Look At TY Holdings' Liabilities

The latest balance sheet data shows that TY Holdings had liabilities of ₩636.5b due within a year, and liabilities of ₩777.3b falling due after that. Offsetting these obligations, it had cash of ₩179.5b as well as receivables valued at ₩434.7b due within 12 months. So it has liabilities totalling ₩799.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩138.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, TY Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is TY Holdings'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.

In the last year TY Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to ₩323b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, TY Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩579b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₩34b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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 example, we've discovered 3 warning signs for TY Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com