Is PungKang (KOSDAQ:093380) A Risky Investment?

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. Importantly, PungKang. Co., Ltd. (KOSDAQ:093380) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is PungKang's Debt?

As you can see below, PungKang had ₩6.70b of debt at November 2024, down from ₩7.50b a year prior. But on the other hand it also has ₩8.24b in cash, leading to a ₩1.54b net cash position.

How Strong Is PungKang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PungKang had liabilities of ₩16.7b due within 12 months and liabilities of ₩5.53b due beyond that. Offsetting these obligations, it had cash of ₩8.24b as well as receivables valued at ₩15.1b due within 12 months. So it actually has ₩1.19b more liquid assets than total liabilities.

This surplus suggests that PungKang has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PungKang boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for PungKang

It is just as well that PungKang's load is not too heavy, because its EBIT was down 95% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since PungKang 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. PungKang may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, PungKang actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case PungKang has ₩1.54b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩298m, being 110% of its EBIT. So we are not troubled with PungKang's debt use. 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 example, we've discovered 3 warning signs for PungKang (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.