David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies VITZROCELL Co., Ltd. (KOSDAQ:082920) makes use of debt. But is this debt a concern to shareholders?
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. 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. 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. 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 VITZROCELL
What Is VITZROCELL's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 VITZROCELL had ₩5.73b of debt, an increase on ₩956.9m, over one year. But on the other hand it also has ₩35.5b in cash, leading to a ₩29.7b net cash position.
How Strong Is VITZROCELL's Balance Sheet?
According to the last reported balance sheet, VITZROCELL had liabilities of ₩20.0b due within 12 months, and liabilities of ₩4.93b due beyond 12 months. Offsetting this, it had ₩35.5b in cash and ₩15.4b in receivables that were due within 12 months. So it actually has ₩25.9b more liquid assets than total liabilities.
This surplus suggests that VITZROCELL has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that VITZROCELL has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact VITZROCELL's saving grace is its low debt levels, because its EBIT has tanked 20% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if VITZROCELL can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. VITZROCELL 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. Looking at the most recent three years, VITZROCELL recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case VITZROCELL has ₩29.7b in net cash and a decent-looking balance sheet. So we don't have any problem with VITZROCELL's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in VITZROCELL, you may well want to click here to check an interactive graph of its earnings per share history.
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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About KOSDAQ:A082920
VITZROCELLLtd
Engages in the production and sale of lithium batteries in South Korea.
Flawless balance sheet and good value.
