Is Cheil Grinding Wheel Ind (KRX:001560) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Cheil Grinding Wheel Ind. Co., Ltd. (KRX:001560) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cheil Grinding Wheel Ind

What Is Cheil Grinding Wheel Ind's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cheil Grinding Wheel Ind had ₩3.50b of debt in September 2020, down from ₩6.13b, one year before. However, its balance sheet shows it holds ₩19.9b in cash, so it actually has ₩16.4b net cash.

A Look At Cheil Grinding Wheel Ind's Liabilities

We can see from the most recent balance sheet that Cheil Grinding Wheel Ind had liabilities of ₩9.52b falling due within a year, and liabilities of ₩4.63b due beyond that. Offsetting these obligations, it had cash of ₩19.9b as well as receivables valued at ₩10.4b due within 12 months. So it can boast ₩16.1b more liquid assets than total liabilities.

This excess liquidity suggests that Cheil Grinding Wheel Ind is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Cheil Grinding Wheel Ind has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Cheil Grinding Wheel Ind's load is not too heavy, because its EBIT was down 20% over the last year. 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 it is Cheil Grinding Wheel Ind's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cheil Grinding Wheel Ind 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, Cheil Grinding Wheel Ind generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Cheil Grinding Wheel Ind has net cash of ₩16.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩5.9b, being 82% of its EBIT. So we don't think Cheil Grinding Wheel Ind's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cheil Grinding Wheel Ind is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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