These 4 Measures Indicate That YC (KOSDAQ:232140) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, YC Corporation (KOSDAQ:232140) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for YC

What Is YC's Debt?

As you can see below, at the end of September 2024, YC had ₩84.7b of debt, up from ₩75.5b a year ago. Click the image for more detail. But on the other hand it also has ₩121.3b in cash, leading to a ₩36.6b net cash position.

How Strong Is YC's Balance Sheet?

We can see from the most recent balance sheet that YC had liabilities of ₩72.8b falling due within a year, and liabilities of ₩59.9b due beyond that. Offsetting these obligations, it had cash of ₩121.3b as well as receivables valued at ₩12.8b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to YC's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩799.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, YC boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that YC has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if YC can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While YC has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, YC saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that YC has net cash of ₩36.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 56% over the last year. So we are not troubled with YC's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for YC that you should be aware of.

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.