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, Yuyu Pharma, Inc. (KRX:000220) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Yuyu Pharma
What Is Yuyu Pharma's Debt?
As you can see below, Yuyu Pharma had ₩19.0b of debt at December 2020, down from ₩26.1b a year prior. However, it does have ₩20.5b in cash offsetting this, leading to net cash of ₩1.52b.
How Healthy Is Yuyu Pharma's Balance Sheet?
The latest balance sheet data shows that Yuyu Pharma had liabilities of ₩18.4b due within a year, and liabilities of ₩19.5b falling due after that. Offsetting this, it had ₩20.5b in cash and ₩19.9b in receivables that were due within 12 months. So it can boast ₩2.55b more liquid assets than total liabilities.
Having regard to Yuyu Pharma's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩129.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Yuyu Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that Yuyu Pharma's EBIT was down 22% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yuyu Pharma 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Yuyu Pharma has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Yuyu Pharma burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Yuyu Pharma has ₩1.52b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Yuyu Pharma's balance sheet. 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. Be aware that Yuyu Pharma is showing 4 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:A000220
Excellent balance sheet and good value.
