We Think THINKWARE (KOSDAQ:084730) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, THINKWARE Corporation (KOSDAQ:084730) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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.

Check out our latest analysis for THINKWARE

How Much Debt Does THINKWARE Carry?

As you can see below, THINKWARE had ₩90.1b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩102.1b in cash, leading to a ₩12.0b net cash position.

A Look At THINKWARE's Liabilities

Zooming in on the latest balance sheet data, we can see that THINKWARE had liabilities of ₩150.3b due within 12 months and liabilities of ₩9.27b due beyond that. Offsetting these obligations, it had cash of ₩102.1b as well as receivables valued at ₩79.6b due within 12 months. So it actually has ₩22.2b more liquid assets than total liabilities.

This surplus suggests that THINKWARE is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, THINKWARE boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that THINKWARE has been able to increase its EBIT by 23% in twelve months, making it easier to pay down 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 THINKWARE 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While THINKWARE 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. Over the last three years, THINKWARE recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that THINKWARE has net cash of ₩12.0b, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So we are not troubled with THINKWARE's debt use. 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. We've identified 1 warning sign with THINKWARE , and understanding them should be part of your investment process.

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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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.