Stock Analysis

Does Woowon Development (KOSDAQ:046940) Have A Healthy Balance Sheet?

KOSDAQ:A046940
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Woowon Development Co., Ltd. (KOSDAQ:046940) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Woowon Development

How Much Debt Does Woowon Development Carry?

As you can see below, Woowon Development had ₩23.0b of debt at September 2020, down from ₩31.0b a year prior. But it also has ₩35.6b in cash to offset that, meaning it has ₩12.6b net cash.

debt-equity-history-analysis
KOSDAQ:A046940 Debt to Equity History January 3rd 2021

How Healthy Is Woowon Development's Balance Sheet?

According to the last reported balance sheet, Woowon Development had liabilities of ₩78.3b due within 12 months, and liabilities of ₩10.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩35.6b as well as receivables valued at ₩59.5b due within 12 months. So it actually has ₩6.18b more liquid assets than total liabilities.

This surplus suggests that Woowon Development has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Woowon Development boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Woowon Development has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Woowon Development'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Woowon Development 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. During the last three years, Woowon Development produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Woowon Development has net cash of ₩12.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't think Woowon Development's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Woowon Development, you may well want to click here to check an interactive graph of its earnings per share history.

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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