Is WON TECHLtd (KOSDAQ:336570) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that WON TECH Co.,Ltd. (KOSDAQ:336570) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for WON TECHLtd

What Is WON TECHLtd's Debt?

As you can see below, at the end of June 2024, WON TECHLtd had ₩17.8b of debt, up from ₩189.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩69.6b in cash, so it actually has ₩51.8b net cash.

A Look At WON TECHLtd's Liabilities

The latest balance sheet data shows that WON TECHLtd had liabilities of ₩46.2b due within a year, and liabilities of ₩1.25b falling due after that. Offsetting this, it had ₩69.6b in cash and ₩16.7b in receivables that were due within 12 months. So it can boast ₩38.8b more liquid assets than total liabilities.

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

It is just as well that WON TECHLtd's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WON TECHLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. WON TECHLtd 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. Looking at the most recent three years, WON TECHLtd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WON TECHLtd has net cash of ₩51.8b, as well as more liquid assets than liabilities. So we are not troubled with WON TECHLtd'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. For example - WON TECHLtd has 1 warning sign we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.