Bosung Power Technology (KOSDAQ:006910) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Bosung Power Technology Co., Ltd (KOSDAQ:006910) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bosung Power Technology

What Is Bosung Power Technology's Net Debt?

As you can see below, Bosung Power Technology had ₩19.7b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩38.1b in cash offsetting this, leading to net cash of ₩18.4b.

How Strong Is Bosung Power Technology's Balance Sheet?

The latest balance sheet data shows that Bosung Power Technology had liabilities of ₩38.6b due within a year, and liabilities of ₩1.98b falling due after that. Offsetting this, it had ₩38.1b in cash and ₩8.61b in receivables that were due within 12 months. So it can boast ₩6.12b more liquid assets than total liabilities.

This surplus suggests that Bosung Power Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bosung Power Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Bosung Power Technology made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩1.7b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bosung Power Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bosung Power Technology 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, Bosung Power Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bosung Power Technology has net cash of ₩18.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩22b, being 1,269% of its EBIT. So we don't have any problem with Bosung Power Technology'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 Bosung Power Technology's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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