Here's Why Ilshin Spinning (KRX:003200) Can Manage Its Debt Responsibly

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 Ilshin Spinning Co., Ltd (KRX:003200) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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.

See our latest analysis for Ilshin Spinning

How Much Debt Does Ilshin Spinning Carry?

As you can see below, Ilshin Spinning had ₩89.5b of debt at December 2020, down from ₩114.1b a year prior. But on the other hand it also has ₩187.7b in cash, leading to a ₩98.2b net cash position.

How Strong Is Ilshin Spinning's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ilshin Spinning had liabilities of ₩155.4b due within 12 months and liabilities of ₩79.2b due beyond that. Offsetting this, it had ₩187.7b in cash and ₩62.7b in receivables that were due within 12 months. So it can boast ₩15.7b more liquid assets than total liabilities.

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

Ilshin Spinning's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ilshin Spinning'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ilshin Spinning 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. In the last three years, Ilshin Spinning's free cash flow amounted to 35% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ilshin Spinning has net cash of ₩98.2b, as well as more liquid assets than liabilities. So we are not troubled with Ilshin Spinning's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Ilshin Spinning (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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