Cayman Golden Century Wheel Group (KOSDAQ:900280) Seems To Use Debt Rather Sparingly

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. As with many other companies Cayman Golden Century Wheel Group Limited (KOSDAQ:900280) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cayman Golden Century Wheel Group

How Much Debt Does Cayman Golden Century Wheel Group Carry?

The image below, which you can click on for greater detail, shows that Cayman Golden Century Wheel Group had debt of ₩16.0b at the end of September 2020, a reduction from ₩29.5b over a year. However, it does have ₩123.3b in cash offsetting this, leading to net cash of ₩107.2b.

A Look At Cayman Golden Century Wheel Group's Liabilities

According to the last reported balance sheet, Cayman Golden Century Wheel Group had liabilities of ₩28.3b due within 12 months, and liabilities of ₩79.7m due beyond 12 months. Offsetting this, it had ₩123.3b in cash and ₩50.3b in receivables that were due within 12 months. So it can boast ₩145.2b more liquid assets than total liabilities.

This surplus strongly suggests that Cayman Golden Century Wheel Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Cayman Golden Century Wheel Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Cayman Golden Century Wheel Group 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 you can't view debt in total isolation; since Cayman Golden Century Wheel Group 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 Cayman Golden Century Wheel Group 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. Looking at the most recent three years, Cayman Golden Century Wheel Group recorded free cash flow of 28% of its EBIT, which is weaker 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, the bottom line is that Cayman Golden Century Wheel Group has net cash of ₩107.2b and plenty of liquid assets. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think Cayman Golden Century Wheel Group's use of debt is risky. 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. Take risks, for example - Cayman Golden Century Wheel Group has 2 warning signs we think 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.

If you decide to trade Cayman Golden Century Wheel Group, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.