VITZROCELLLtd (KOSDAQ:082920) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies VITZROCELL Co.,Ltd. (KOSDAQ:082920) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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, 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.

Check out our latest analysis for VITZROCELLLtd

How Much Debt Does VITZROCELLLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 VITZROCELLLtd had ₩17.6b of debt, an increase on ₩1.21b, over one year. But it also has ₩57.7b in cash to offset that, meaning it has ₩40.0b net cash.

How Healthy Is VITZROCELLLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VITZROCELLLtd had liabilities of ₩11.4b due within 12 months and liabilities of ₩21.1b due beyond that. Offsetting this, it had ₩57.7b in cash and ₩14.4b in receivables that were due within 12 months. So it can boast ₩39.7b more liquid assets than total liabilities.

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

It is just as well that VITZROCELLLtd's load is not too heavy, because its EBIT was down 28% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if VITZROCELLLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While VITZROCELLLtd 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. In the last three years, VITZROCELLLtd's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that VITZROCELLLtd has net cash of ₩40.0b, as well as more liquid assets than liabilities. So we are not troubled with VITZROCELLLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with VITZROCELLLtd , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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