We Think COWINTECH (KOSDAQ:282880) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, COWINTECH Co. Ltd. (KOSDAQ:282880) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for COWINTECH

What Is COWINTECH's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 COWINTECH had debt of ₩14.6b, up from none in one year. However, its balance sheet shows it holds ₩53.5b in cash, so it actually has ₩38.9b net cash.

How Strong Is COWINTECH's Balance Sheet?

We can see from the most recent balance sheet that COWINTECH had liabilities of ₩23.1b falling due within a year, and liabilities of ₩87.8m due beyond that. Offsetting this, it had ₩53.5b in cash and ₩26.2b in receivables that were due within 12 months. So it actually has ₩56.6b more liquid assets than total liabilities.

It's good to see that COWINTECH has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that COWINTECH has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that COWINTECH's load is not too heavy, because its EBIT was down 85% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine COWINTECH's ability to maintain a healthy balance sheet going forward. 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. While COWINTECH 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 two years, COWINTECH burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case COWINTECH has ₩38.9b in net cash and a decent-looking balance sheet. So we don't have any problem with COWINTECH's use of debt. 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. Take risks, for example - COWINTECH has 3 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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