YoungWoo DSPLtd (KOSDAQ:143540) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies YoungWoo DSP Co.,Ltd (KOSDAQ:143540) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for YoungWoo DSPLtd

How Much Debt Does YoungWoo DSPLtd Carry?

As you can see below, YoungWoo DSPLtd had ₩28.5b of debt at September 2020, down from ₩43.2b a year prior. On the flip side, it has ₩14.6b in cash leading to net debt of about ₩13.8b.

How Healthy Is YoungWoo DSPLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YoungWoo DSPLtd had liabilities of ₩61.5b due within 12 months and liabilities of ₩20.0b due beyond that. On the other hand, it had cash of ₩14.6b and ₩52.2b worth of receivables due within a year. So its liabilities total ₩14.7b more than the combination of its cash and short-term receivables.

Of course, YoungWoo DSPLtd has a market capitalization of ₩107.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

YoungWoo DSPLtd has a low debt to EBITDA ratio of only 0.69. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Although YoungWoo DSPLtd made a loss at the EBIT level, last year, it was also good to see that it generated ₩19b in EBIT over the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, YoungWoo DSPLtd actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that YoungWoo DSPLtd's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Looking at the bigger picture, we think YoungWoo DSPLtd's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with YoungWoo DSPLtd , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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