Is Young Poong (KRX:000670) Weighed On By Its Debt Load?

Simply Wall St · 10/16 05:14

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Young Poong Corporation (KRX:000670) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Young Poong

What Is Young Poong's Debt?

As you can see below, at the end of June 2024, Young Poong had ₩452.7b of debt, up from ₩394.5b a year ago. Click the image for more detail. But it also has ₩488.1b in cash to offset that, meaning it has ₩35.4b net cash.

debt-equity-history-analysis
KOSE:A000670 Debt to Equity History October 16th 2024

A Look At Young Poong's Liabilities

The latest balance sheet data shows that Young Poong had liabilities of ₩684.0b due within a year, and liabilities of ₩570.9b falling due after that. Offsetting this, it had ₩488.1b in cash and ₩414.8b in receivables that were due within 12 months. So it has liabilities totalling ₩352.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Young Poong has a market capitalization of ₩724.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Young Poong boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Young Poong 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, Young Poong made a loss at the EBIT level, and saw its revenue drop to ₩3.4t, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Young Poong?

Although Young Poong had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩85b. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 3 warning signs for Young Poong you should be aware of, and 2 of them make us uncomfortable.

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.