Is YAS (KOSDAQ:255440) A Risky Investment?

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.' 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, YAS Co., Ltd. (KOSDAQ:255440) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for YAS

What Is YAS's Net Debt?

The chart below, which you can click on for greater detail, shows that YAS had ₩3.85b in debt in September 2024; about the same as the year before. But on the other hand it also has ₩31.3b in cash, leading to a ₩27.4b net cash position.

How Strong Is YAS' Balance Sheet?

According to the last reported balance sheet, YAS had liabilities of ₩37.4b due within 12 months, and liabilities of ₩6.81b due beyond 12 months. Offsetting these obligations, it had cash of ₩31.3b as well as receivables valued at ₩7.99b due within 12 months. So it has liabilities totalling ₩4.97b more than its cash and near-term receivables, combined.

Since publicly traded YAS shares are worth a total of ₩100.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, YAS also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since YAS 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.

Over 12 months, YAS made a loss at the EBIT level, and saw its revenue drop to ₩36b, which is a fall of 5.0%. That's not what we would hope to see.

So How Risky Is YAS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that YAS had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩11b of cash and made a loss of ₩4.8b. While this does make the company a bit risky, it's important to remember it has net cash of ₩27.4b. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that YAS is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.