Is YoungWoo DSPLtd (KOSDAQ:143540) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for YoungWoo DSPLtd

What Is YoungWoo DSPLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that YoungWoo DSPLtd had ₩26.5b of debt in June 2024, down from ₩29.0b, one year before. However, it does have ₩13.5b in cash offsetting this, leading to net debt of about ₩13.0b.

A Look At YoungWoo DSPLtd's Liabilities

According to the last reported balance sheet, YoungWoo DSPLtd had liabilities of ₩46.3b due within 12 months, and liabilities of ₩537.3m due beyond 12 months. On the other hand, it had cash of ₩13.5b and ₩6.11b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩27.2b.

This deficit is considerable relative to its market capitalization of ₩27.5b, so it does suggest shareholders should keep an eye on YoungWoo DSPLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since YoungWoo DSPLtd 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.

Over 12 months, YoungWoo DSPLtd reported revenue of ₩72b, which is a gain of 211%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate YoungWoo DSPLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₩7.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩436m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example YoungWoo DSPLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.