Pangrim (KRX:003610) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Pangrim Co., Ltd. (KRX:003610) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pangrim

How Much Debt Does Pangrim Carry?

The image below, which you can click on for greater detail, shows that Pangrim had debt of ₩18.1b at the end of June 2020, a reduction from ₩24.0b over a year. But it also has ₩86.9b in cash to offset that, meaning it has ₩68.7b net cash.

How Strong Is Pangrim's Balance Sheet?

The latest balance sheet data shows that Pangrim had liabilities of ₩32.1b due within a year, and liabilities of ₩8.58b falling due after that. Offsetting these obligations, it had cash of ₩86.9b as well as receivables valued at ₩10.6b due within 12 months. So it actually has ₩56.8b more liquid assets than total liabilities.

This luscious liquidity implies that Pangrim's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Pangrim has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Pangrim's saving grace is its low debt levels, because its EBIT has tanked 79% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Pangrim 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, a company can only pay off debt with cold hard cash, not accounting profits. Pangrim 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, Pangrim actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pangrim has net cash of ₩68.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 504% of that EBIT to free cash flow, bringing in ₩17b. So we don't think Pangrim'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. For example, we've discovered 4 warning signs for Pangrim (1 shouldn't be ignored!) 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.

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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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