These 4 Measures Indicate That Vieworks (KOSDAQ:100120) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Vieworks Co., Ltd. (KOSDAQ:100120) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Vieworks

How Much Debt Does Vieworks Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Vieworks had debt of ₩8.00b, up from ₩1.70b in one year. But on the other hand it also has ₩40.5b in cash, leading to a ₩32.5b net cash position.

How Strong Is Vieworks' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vieworks had liabilities of ₩25.0b due within 12 months and liabilities of ₩1.32b due beyond that. On the other hand, it had cash of ₩40.5b and ₩24.9b worth of receivables due within a year. So it can boast ₩39.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Vieworks could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Vieworks boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Vieworks has increased its EBIT by 9.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Vieworks'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. While Vieworks 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. In the last three years, Vieworks created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Vieworks has ₩32.5b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.9% over the last year. So is Vieworks's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Vieworks (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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