Is CYMECHS (KOSDAQ:160980) A Risky Investment?

Warren Buffett famously said, '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. Importantly, CYMECHS Inc. (KOSDAQ:160980) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CYMECHS

How Much Debt Does CYMECHS Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 CYMECHS had ₩28.9b of debt, an increase on ₩21.8b, over one year. However, it does have ₩42.6b in cash offsetting this, leading to net cash of ₩13.7b.

How Strong Is CYMECHS' Balance Sheet?

According to the last reported balance sheet, CYMECHS had liabilities of ₩44.2b due within 12 months, and liabilities of ₩6.95b due beyond 12 months. On the other hand, it had cash of ₩42.6b and ₩26.9b worth of receivables due within a year. So it actually has ₩18.3b more liquid assets than total liabilities.

This surplus suggests that CYMECHS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CYMECHS boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, CYMECHS turned things around in the last 12 months, delivering and EBIT of ₩22b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CYMECHS 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year, CYMECHS produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CYMECHS has net cash of ₩13.7b, as well as more liquid assets than liabilities. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for CYMECHS you should know about.

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. 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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