Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Yesco Holdings Co., Ltd. (KRX:015360) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Yesco Holdings
What Is Yesco Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Yesco Holdings had debt of ₩517.6b, up from ₩393.8b in one year. On the flip side, it has ₩332.0b in cash leading to net debt of about ₩185.6b.
How Strong Is Yesco Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yesco Holdings had liabilities of ₩333.6b due within 12 months and liabilities of ₩566.8b due beyond that. Offsetting this, it had ₩332.0b in cash and ₩175.1b in receivables that were due within 12 months. So its liabilities total ₩393.3b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₩149.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Yesco Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Yesco Holdings 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 Yesco Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.2%, to ₩1.1t. We would much prefer see growth.
Caveat Emptor
Importantly, Yesco Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩15b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through ₩10b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Yesco Holdings (2 are potentially serious!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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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About KOSE:A015360
Yesco Holdings
Engages in the supply of city gas in Seoul and Gyeonggi-do, South Korea.
Solid track record with adequate balance sheet.
