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.' 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 ILSEUNG Co., Ltd. (KOSDAQ:333430) makes use of debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for ILSEUNG
What Is ILSEUNG's Debt?
As you can see below, ILSEUNG had ₩24.9b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩24.5b in cash, and so its net debt is ₩420.9m.
How Healthy Is ILSEUNG's Balance Sheet?
We can see from the most recent balance sheet that ILSEUNG had liabilities of ₩11.4b falling due within a year, and liabilities of ₩21.9b due beyond that. Offsetting this, it had ₩24.5b in cash and ₩6.91b in receivables that were due within 12 months. So its liabilities total ₩1.90b more than the combination of its cash and short-term receivables.
Having regard to ILSEUNG's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩102.8b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, ILSEUNG has virtually no net debt, so it's fair to say it does not have a heavy debt load!
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
ILSEUNG has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.075 and EBIT of 15.6 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. Also good is that ILSEUNG grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is ILSEUNG's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, ILSEUNG saw substantial negative free cash flow, in total. 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.
Our View
ILSEUNG's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. Considering this range of data points, we think ILSEUNG is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for ILSEUNG 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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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.
About KOSDAQ:A333430
ILSEUNG
Produces and sells marine equipment in South Korea and internationally.
Solid track record with excellent balance sheet.