We Think THINKWARE (KOSDAQ:084730) Can Manage Its Debt With Ease

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. We can see that THINKWARE Corporation (KOSDAQ:084730) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for THINKWARE

What Is THINKWARE's Net Debt?

As you can see below, at the end of September 2020, THINKWARE had ₩31.8b of debt, up from ₩29.7b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩57.8b in cash, so it actually has ₩26.0b net cash.

How Strong Is THINKWARE's Balance Sheet?

We can see from the most recent balance sheet that THINKWARE had liabilities of ₩56.2b falling due within a year, and liabilities of ₩8.42b due beyond that. On the other hand, it had cash of ₩57.8b and ₩20.6b worth of receivables due within a year. So it actually has ₩13.7b more liquid assets than total liabilities.

This short term liquidity is a sign that THINKWARE could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that THINKWARE has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that THINKWARE has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since THINKWARE will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. THINKWARE may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, THINKWARE actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that THINKWARE has net cash of ₩26.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩7.7b, being 121% of its EBIT. So is THINKWARE's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for THINKWARE that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you decide to trade THINKWARE, 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.