Tae Kwang (KOSDAQ:023160) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Tae Kwang Corporation (KOSDAQ:023160) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tae Kwang

What Is Tae Kwang's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tae Kwang had ₩10.0b of debt, an increase on none, over one year. But on the other hand it also has ₩63.2b in cash, leading to a ₩53.2b net cash position.

A Look At Tae Kwang's Liabilities

According to the last reported balance sheet, Tae Kwang had liabilities of ₩29.1b due within 12 months, and liabilities of ₩8.24b due beyond 12 months. On the other hand, it had cash of ₩63.2b and ₩55.6b worth of receivables due within a year. So it can boast ₩81.4b more liquid assets than total liabilities.

This excess liquidity suggests that Tae Kwang is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Tae Kwang boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tae Kwang's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tae Kwang's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Tae Kwang?

Although Tae Kwang had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩30b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Tae Kwang , and understanding them should be part of your investment process.

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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