CYMECHS (KOSDAQ:160980) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CYMECHS Inc. (KOSDAQ:160980) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CYMECHS

How Much Debt Does CYMECHS Carry?

The image below, which you can click on for greater detail, shows that CYMECHS had debt of ₩15.0b at the end of June 2024, a reduction from ₩39.0b over a year. However, it does have ₩70.9b in cash offsetting this, leading to net cash of ₩55.9b.

How Strong Is CYMECHS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CYMECHS had liabilities of ₩34.9b due within 12 months and liabilities of ₩10.9b due beyond that. Offsetting this, it had ₩70.9b in cash and ₩31.6b in receivables that were due within 12 months. So it can boast ₩56.7b more liquid assets than total liabilities.

This luscious liquidity implies that CYMECHS' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that CYMECHS has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, CYMECHS saw its EBIT drop by 6.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CYMECHS's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CYMECHS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, CYMECHS generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CYMECHS has net cash of ₩55.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩17b, being 99% of its EBIT. So is CYMECHS's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for CYMECHS you should be aware of, and 1 of them is potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.