Is Iljin Power (KOSDAQ:094820) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Iljin Power Co., Ltd. (KOSDAQ:094820) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Iljin Power

What Is Iljin Power's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Iljin Power had ₩14.3b of debt, an increase on none, over one year. But on the other hand it also has ₩47.1b in cash, leading to a ₩32.8b net cash position.

How Strong Is Iljin Power's Balance Sheet?

According to the last reported balance sheet, Iljin Power had liabilities of ₩27.0b due within 12 months, and liabilities of ₩37.7b due beyond 12 months. On the other hand, it had cash of ₩47.1b and ₩22.0b worth of receivables due within a year. So it can boast ₩4.31b more liquid assets than total liabilities.

This short term liquidity is a sign that Iljin Power could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Iljin Power boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Iljin Power's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Iljin Power will need earnings to service that debt. 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 Iljin Power 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. Over the last three years, Iljin Power saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Iljin Power has net cash of ₩32.8b, as well as more liquid assets than liabilities. So while Iljin Power does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Iljin Power you should be aware of, and 1 of them is concerning.

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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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.