We Think YEST (KOSDAQ:122640) Can Stay On Top Of Its Debt

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. As with many other companies YEST Co., Ltd. (KOSDAQ:122640) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YEST

What Is YEST's Debt?

The image below, which you can click on for greater detail, shows that YEST had debt of ₩43.8b at the end of September 2024, a reduction from ₩74.8b over a year. However, it also had ₩25.4b in cash, and so its net debt is ₩18.4b.

How Strong Is YEST's Balance Sheet?

According to the last reported balance sheet, YEST had liabilities of ₩54.6b due within 12 months, and liabilities of ₩26.7b due beyond 12 months. On the other hand, it had cash of ₩25.4b and ₩30.3b worth of receivables due within a year. So it has liabilities totalling ₩25.7b more than its cash and near-term receivables, combined.

Given YEST has a market capitalization of ₩268.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 1.3 times EBITDA, it is initially surprising to see that YEST's EBIT has low interest coverage of 1.7 times. So one way or the other, it's clear the debt levels are not trivial. We also note that YEST improved its EBIT from a last year's loss to a positive ₩10b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since YEST will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the most recent year, YEST recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

YEST's interest cover was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we thought its net debt to EBITDA was a positive. When we consider all the elements mentioned above, it seems to us that YEST is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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 instance, we've identified 1 warning sign for YEST that you should be aware of.

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.