We Think Myoung Shin IndustrialLtd (KRX:009900) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Myoung Shin Industrial Co.,Ltd (KRX:009900) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for Myoung Shin IndustrialLtd

How Much Debt Does Myoung Shin IndustrialLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Myoung Shin IndustrialLtd had debt of ₩199.5b, up from ₩175.4b in one year. But it also has ₩265.6b in cash to offset that, meaning it has ₩66.1b net cash.

A Look At Myoung Shin IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Myoung Shin IndustrialLtd had liabilities of ₩304.0b due within 12 months and liabilities of ₩225.9b due beyond that. Offsetting these obligations, it had cash of ₩265.6b as well as receivables valued at ₩188.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩75.8b.

Since publicly traded Myoung Shin IndustrialLtd shares are worth a total of ₩704.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Myoung Shin IndustrialLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Myoung Shin IndustrialLtd has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Myoung Shin IndustrialLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Myoung Shin IndustrialLtd 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. Looking at the most recent three years, Myoung Shin IndustrialLtd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Myoung Shin IndustrialLtd does have more liabilities than liquid assets, it also has net cash of ₩66.1b. So we don't have any problem with Myoung Shin IndustrialLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Myoung Shin IndustrialLtd's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.