YEST (KOSDAQ:122640) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that YEST Co., Ltd. (KOSDAQ:122640) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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 chart below, which you can click on for greater detail, shows that YEST had ₩90.3b in debt in September 2020; about the same as the year before. On the flip side, it has ₩14.8b in cash leading to net debt of about ₩75.6b.

A Look At YEST's Liabilities

We can see from the most recent balance sheet that YEST had liabilities of ₩73.0b falling due within a year, and liabilities of ₩32.6b due beyond that. On the other hand, it had cash of ₩14.8b and ₩12.0b worth of receivables due within a year. So its liabilities total ₩78.7b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩123.0b, so it does suggest shareholders should keep an eye on YEST's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, YEST reported revenue of ₩65b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, YEST had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩17b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩5.1b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 YEST is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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