Is Visang Education (KRX:100220) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Visang Education Inc (KRX:100220) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Visang Education

What Is Visang Education's Debt?

As you can see below, at the end of September 2020, Visang Education had ₩8.40b of debt, up from ₩6.40b a year ago. Click the image for more detail. But it also has ₩28.1b in cash to offset that, meaning it has ₩19.7b net cash.

How Healthy Is Visang Education's Balance Sheet?

According to the last reported balance sheet, Visang Education had liabilities of ₩43.5b due within 12 months, and liabilities of ₩11.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩28.1b as well as receivables valued at ₩50.6b due within 12 months. So it actually has ₩23.6b more liquid assets than total liabilities.

This surplus suggests that Visang Education is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Visang Education boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Visang Education 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.

In the last year Visang Education wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to ₩194b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Visang Education?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Visang Education had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩5.8b and booked a ₩10.0b accounting loss. Given it only has net cash of ₩19.7b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 3 warning signs for Visang Education you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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