Would Woosung Feed (KRX:006980) Be Better Off With Less Debt?

Warren Buffett famously said, '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. As with many other companies Woosung Feed Co., Ltd. (KRX:006980) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Woosung Feed

How Much Debt Does Woosung Feed Carry?

As you can see below, Woosung Feed had ₩59.5b of debt at September 2020, down from ₩91.3b a year prior. However, because it has a cash reserve of ₩40.3b, its net debt is less, at about ₩19.1b.

A Look At Woosung Feed's Liabilities

The latest balance sheet data shows that Woosung Feed had liabilities of ₩123.8b due within a year, and liabilities of ₩14.7b falling due after that. Offsetting these obligations, it had cash of ₩40.3b as well as receivables valued at ₩56.9b due within 12 months. So its liabilities total ₩41.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Woosung Feed has a market capitalization of ₩84.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Woosung Feed'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.

In the last year Woosung Feed wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₩372b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Woosung Feed had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.4b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 2 warning signs for Woosung Feed that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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