Is Bosung Power Technology (KOSDAQ:006910) 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.' 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. We can see that Bosung Power Technology Co., Ltd (KOSDAQ:006910) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bosung Power Technology

What Is Bosung Power Technology's Debt?

The chart below, which you can click on for greater detail, shows that Bosung Power Technology had ₩19.8b in debt in June 2020; about the same as the year before. But it also has ₩39.1b in cash to offset that, meaning it has ₩19.3b net cash.

How Healthy Is Bosung Power Technology's Balance Sheet?

The latest balance sheet data shows that Bosung Power Technology had liabilities of ₩40.4b due within a year, and liabilities of ₩1.84b falling due after that. Offsetting this, it had ₩39.1b in cash and ₩8.76b in receivables that were due within 12 months. So it actually has ₩5.64b more liquid assets than total liabilities.

This short term liquidity is a sign that Bosung Power Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 ₩156m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bosung Power Technology's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. While Bosung Power Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Bosung Power Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bosung Power Technology has net cash of ₩19.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩24b, being 15,069% of its EBIT. So we are not troubled with Bosung Power Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Bosung Power Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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