Is Pungguk Ethanol Industrial (KOSDAQ:023900) A Risky Investment?

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 Pungguk Ethanol Industrial Co., Ltd (KOSDAQ:023900) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pungguk Ethanol Industrial

What Is Pungguk Ethanol Industrial's Debt?

As you can see below, at the end of September 2020, Pungguk Ethanol Industrial had ₩14.4b of debt, up from ₩13.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩36.6b in cash, so it actually has ₩22.2b net cash.

How Healthy Is Pungguk Ethanol Industrial's Balance Sheet?

The latest balance sheet data shows that Pungguk Ethanol Industrial had liabilities of ₩21.2b due within a year, and liabilities of ₩9.47b falling due after that. Offsetting these obligations, it had cash of ₩36.6b as well as receivables valued at ₩26.0b due within 12 months. So it actually has ₩31.9b more liquid assets than total liabilities.

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

On the other hand, Pungguk Ethanol Industrial saw its EBIT drop by 8.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pungguk Ethanol Industrial's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pungguk Ethanol Industrial 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, Pungguk Ethanol Industrial reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pungguk Ethanol Industrial has net cash of ₩22.2b, as well as more liquid assets than liabilities. So we are not troubled with Pungguk Ethanol Industrial's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Pungguk Ethanol Industrial (including 1 which is a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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