PNE Solution (KOSDAQ:131390) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, PNE Solution Co., Ltd (KOSDAQ:131390) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PNE Solution

What Is PNE Solution's Debt?

You can click the graphic below for the historical numbers, but it shows that PNE Solution had ₩6.00b of debt in December 2020, down from ₩12.7b, one year before. But on the other hand it also has ₩55.8b in cash, leading to a ₩49.8b net cash position.

How Healthy Is PNE Solution's Balance Sheet?

The latest balance sheet data shows that PNE Solution had liabilities of ₩100.9b due within a year, and liabilities of ₩1.08b falling due after that. On the other hand, it had cash of ₩55.8b and ₩19.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩27.1b.

Given PNE Solution has a market capitalization of ₩307.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, PNE Solution also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that PNE Solution grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PNE Solution 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PNE Solution 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. During the last three years, PNE Solution produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about PNE Solution's liabilities, but we can be reassured by the fact it has has net cash of ₩49.8b. And we liked the look of last year's 16% year-on-year EBIT growth. So we don't think PNE Solution's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for PNE Solution that you should be aware of.

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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