Health Check: How Prudently Does RYUK-IL C&S (KOSDAQ:191410) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, RYUK-IL C&S., Ltd (KOSDAQ:191410) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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 RYUK-IL C&S

What Is RYUK-IL C&S's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 RYUK-IL C&S had ₩46.2b of debt, an increase on ₩40.3b, over one year. However, it does have ₩5.48b in cash offsetting this, leading to net debt of about ₩40.7b.

A Look At RYUK-IL C&S's Liabilities

We can see from the most recent balance sheet that RYUK-IL C&S had liabilities of ₩65.0b falling due within a year, and liabilities of ₩2.91b due beyond that. On the other hand, it had cash of ₩5.48b and ₩13.6b worth of receivables due within a year. So its liabilities total ₩48.8b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩26.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, RYUK-IL C&S would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RYUK-IL C&S 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.

In the last year RYUK-IL C&S's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months RYUK-IL C&S produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩10b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₩10b over the last twelve months. So suffice it to say we consider the stock to be risky. 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 instance, we've identified 4 warning signs for RYUK-IL C&S (2 can't be ignored) 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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