Is Pusan Cast Iron (KRX:005030) Using Debt Sensibly?

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.' 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. Importantly, Pusan Cast Iron Co., Ltd. (KRX:005030) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Pusan Cast Iron

How Much Debt Does Pusan Cast Iron Carry?

You can click the graphic below for the historical numbers, but it shows that Pusan Cast Iron had ₩152.4b of debt in December 2020, down from ₩168.8b, one year before. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Pusan Cast Iron's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pusan Cast Iron had liabilities of ₩147.6b due within 12 months and liabilities of ₩75.5b due beyond that. Offsetting these obligations, it had cash of ₩768.4m as well as receivables valued at ₩33.5b due within 12 months. So its liabilities total ₩188.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩36.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Pusan Cast Iron 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 Pusan Cast Iron 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, Pusan Cast Iron made a loss at the EBIT level, and saw its revenue drop to ₩153b, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Pusan Cast Iron's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩4.0b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized ₩12b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Pusan Cast Iron you should be aware of, and 1 of them doesn't sit too well with us.

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.

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