CHUNGDAHM Learning (KOSDAQ:096240) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CHUNGDAHM Learning, Inc. (KOSDAQ:096240) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CHUNGDAHM Learning

What Is CHUNGDAHM Learning's Debt?

You can click the graphic below for the historical numbers, but it shows that CHUNGDAHM Learning had ₩38.0b of debt in December 2020, down from ₩40.8b, one year before. However, its balance sheet shows it holds ₩61.4b in cash, so it actually has ₩23.4b net cash.

A Look At CHUNGDAHM Learning's Liabilities

According to the last reported balance sheet, CHUNGDAHM Learning had liabilities of ₩77.5b due within 12 months, and liabilities of ₩28.8b due beyond 12 months. On the other hand, it had cash of ₩61.4b and ₩17.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩27.8b.

Of course, CHUNGDAHM Learning has a market capitalization of ₩193.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, CHUNGDAHM Learning also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that CHUNGDAHM Learning's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CHUNGDAHM Learning's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. CHUNGDAHM Learning 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, CHUNGDAHM Learning 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 CHUNGDAHM Learning does have more liabilities than liquid assets, it also has net cash of ₩23.4b. And it impressed us with free cash flow of ₩27b, being 112% of its EBIT. So we are not troubled with CHUNGDAHM Learning'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. Be aware that CHUNGDAHM Learning is showing 3 warning signs in our investment analysis , 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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