Wonik Cube (KOSDAQ:014190) Seems To Use Debt Rather Sparingly

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. We note that Wonik Cube Corp. (KOSDAQ:014190) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wonik Cube

How Much Debt Does Wonik Cube Carry?

The image below, which you can click on for greater detail, shows that Wonik Cube had debt of ₩30.1b at the end of September 2020, a reduction from ₩70.4b over a year. But on the other hand it also has ₩35.6b in cash, leading to a ₩5.44b net cash position.

How Healthy Is Wonik Cube's Balance Sheet?

The latest balance sheet data shows that Wonik Cube had liabilities of ₩46.9b due within a year, and liabilities of ₩2.79b falling due after that. Offsetting these obligations, it had cash of ₩35.6b as well as receivables valued at ₩39.6b due within 12 months. So it actually has ₩25.5b more liquid assets than total liabilities.

This surplus strongly suggests that Wonik Cube has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wonik Cube has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Wonik Cube turned things around in the last 12 months, delivering and EBIT of ₩1.9b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wonik Cube 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wonik Cube 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, Wonik Cube actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wonik Cube has net cash of ₩5.44b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩15b, being 787% of its EBIT. So we don't think Wonik Cube's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Wonik Cube .

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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