Does YJM Games (KOSDAQ:193250) Have A Healthy Balance Sheet?

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.' 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. We note that YJM Games Co., Ltd. (KOSDAQ:193250) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for YJM Games

What Is YJM Games's Debt?

As you can see below, YJM Games had ₩6.53b of debt at September 2020, down from ₩9.54b a year prior. But on the other hand it also has ₩22.1b in cash, leading to a ₩15.6b net cash position.

A Look At YJM Games's Liabilities

According to the last reported balance sheet, YJM Games had liabilities of ₩14.7b due within 12 months, and liabilities of ₩2.94b due beyond 12 months. Offsetting these obligations, it had cash of ₩22.1b as well as receivables valued at ₩6.67b due within 12 months. So it can boast ₩11.2b more liquid assets than total liabilities.

This surplus suggests that YJM Games has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that YJM Games has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is YJM Games'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.

Over 12 months, YJM Games made a loss at the EBIT level, and saw its revenue drop to ₩32b, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is YJM Games?

While YJM Games lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩1.5b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with YJM Games (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.
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