Does YIK (KOSDAQ:232140) Have A Healthy Balance Sheet?

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.' 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 YIK Corporation (KOSDAQ:232140) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YIK

What Is YIK's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 YIK had debt of ₩80.8b, up from ₩76.2b in one year. But it also has ₩115.8b in cash to offset that, meaning it has ₩35.0b net cash.

A Look At YIK's Liabilities

The latest balance sheet data shows that YIK had liabilities of ₩76.7b due within a year, and liabilities of ₩37.8b falling due after that. Offsetting this, it had ₩115.8b in cash and ₩11.0b in receivables that were due within 12 months. So it actually has ₩12.3b more liquid assets than total liabilities.

This short term liquidity is a sign that YIK could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that YIK has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for YIK if management cannot prevent a repeat of the 76% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is YIK'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While YIK 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, YIK 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 it is always sensible to investigate a company's debt, in this case YIK has ₩35.0b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about YIK's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example YIK has 3 warning signs (and 2 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.