Is Woowon Development (KOSDAQ:046940) Using Too Much Debt?

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.' 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. As with many other companies Woowon Development Co., Ltd. (KOSDAQ:046940) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Woowon Development

What Is Woowon Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Woowon Development had ₩14.4b of debt in December 2020, down from ₩53.5b, one year before. But on the other hand it also has ₩49.6b in cash, leading to a ₩35.3b net cash position.

A Look At Woowon Development's Liabilities

We can see from the most recent balance sheet that Woowon Development had liabilities of ₩68.8b falling due within a year, and liabilities of ₩9.29b due beyond that. Offsetting these obligations, it had cash of ₩49.6b as well as receivables valued at ₩30.5b due within 12 months. So it actually has ₩2.03b more liquid assets than total liabilities.

Having regard to Woowon Development's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩126.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Woowon Development has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Woowon Development has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Woowon Development's earnings that will influence how the balance sheet holds up in the future. 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. Woowon Development 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. Over the last three years, Woowon Development 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 it is always sensible to investigate a company's debt, in this case Woowon Development has ₩35.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in ₩70b. So we don't think Woowon Development's use of debt is risky. 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 Woowon Development'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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