Is YoungWoo DSPLtd (KOSDAQ:143540) Using Debt In A Risky Way?

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 YoungWoo DSP Co.,Ltd (KOSDAQ:143540) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is YoungWoo DSPLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that YoungWoo DSPLtd had ₩23.8b of debt in December 2024, down from ₩27.0b, one year before. However, because it has a cash reserve of ₩10.7b, its net debt is less, at about ₩13.0b.

A Look At YoungWoo DSPLtd's Liabilities

According to the last reported balance sheet, YoungWoo DSPLtd had liabilities of ₩43.2b due within 12 months, and liabilities of ₩533.4m due beyond 12 months. Offsetting this, it had ₩10.7b in cash and ₩9.18b in receivables that were due within 12 months. So its liabilities total ₩23.8b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩23.3b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is YoungWoo DSPLtd'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 .

View our latest analysis for YoungWoo DSPLtd

Over 12 months, YoungWoo DSPLtd reported revenue of ₩59b, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, YoungWoo DSPLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩5.0b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩2.0b in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for YoungWoo DSPLtd (1 is a bit concerning) you should be aware of.

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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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.