These 4 Measures Indicate That Woowon Development (KOSDAQ:046940) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Woowon Development Co., Ltd. (KOSDAQ:046940) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Woowon Development's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Woowon Development had ₩24.9b of debt, an increase on ₩22.0b, over one year. However, its balance sheet shows it holds ₩26.0b in cash, so it actually has ₩1.13b net cash.

A Look At Woowon Development's Liabilities

We can see from the most recent balance sheet that Woowon Development had liabilities of ₩116.1b falling due within a year, and liabilities of ₩8.93b due beyond that. Offsetting this, it had ₩26.0b in cash and ₩73.1b in receivables that were due within 12 months. So it has liabilities totalling ₩25.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Woowon Development has a market capitalization of ₩54.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Woowon Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Woowon Development

It is just as well that Woowon Development's load is not too heavy, because its EBIT was down 81% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Woowon Development 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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Woowon Development does have more liabilities than liquid assets, it also has net cash of ₩1.13b. And it impressed us with free cash flow of ₩15b, being 92% of its EBIT. So we don't have any problem with Woowon Development's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Woowon Development (of which 1 makes us a bit uncomfortable!) you should know about.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.