YJM Games (KOSDAQ:193250) Has Debt But No Earnings; Should You Worry?

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.' 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 the more important question is: how much risk is that debt creating?

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. 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.

View our latest analysis for YJM Games

How Much Debt Does YJM Games Carry?

You can click the graphic below for the historical numbers, but it shows that YJM Games had ₩6.79b of debt in December 2020, down from ₩8.21b, one year before. But on the other hand it also has ₩18.7b in cash, leading to a ₩11.9b net cash position.

A Look At YJM Games' Liabilities

We can see from the most recent balance sheet that YJM Games had liabilities of ₩12.5b falling due within a year, and liabilities of ₩3.25b due beyond that. Offsetting these obligations, it had cash of ₩18.7b as well as receivables valued at ₩4.97b due within 12 months. So it can boast ₩7.85b 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 you can't view debt in total isolation; since YJM Games 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.

In the last year YJM Games had a loss before interest and tax, and actually shrunk its revenue by 25%, to ₩30b. To be frank that doesn't bode well.

So How Risky Is YJM Games?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months YJM Games lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩5.2b of cash and made a loss of ₩8.0b. Given it only has net cash of ₩11.9b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that YJM Games is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.

When trading YJM Games or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.