Here's Why YIK (KOSDAQ:232140) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies YIK Corporation (KOSDAQ:232140) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for YIK

How Much Debt Does YIK Carry?

You can click the graphic below for the historical numbers, but it shows that YIK had ₩34.0b of debt in September 2020, down from ₩50.6b, one year before. But it also has ₩124.9b in cash to offset that, meaning it has ₩90.8b net cash.

A Look At YIK's Liabilities

Zooming in on the latest balance sheet data, we can see that YIK had liabilities of ₩88.4b due within 12 months and liabilities of ₩16.5b due beyond that. Offsetting these obligations, it had cash of ₩124.9b as well as receivables valued at ₩29.9b due within 12 months. So it can boast ₩49.9b 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.

We also note that YIK improved its EBIT from a last year's loss to a positive ₩13b. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since YIK will need earnings to service that debt. 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. Happily for any shareholders, YIK 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.

Summing up

While it is always sensible to investigate a company's debt, in this case YIK has ₩90.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 286% of that EBIT to free cash flow, bringing in ₩37b. So we don't think YIK's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for YIK (1 is significant) you should be aware of.

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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