WON TECHLtd (KOSDAQ:336570) Seems To Use Debt Rather Sparingly

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.' 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 can see that WON TECH Co.,Ltd. (KOSDAQ:336570) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for WON TECHLtd

How Much Debt Does WON TECHLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2023 WON TECHLtd had debt of ₩16.7b, up from ₩5.23b in one year. However, it does have ₩78.9b in cash offsetting this, leading to net cash of ₩62.2b.

A Look At WON TECHLtd's Liabilities

The latest balance sheet data shows that WON TECHLtd had liabilities of ₩52.9b due within a year, and liabilities of ₩1.08b falling due after that. Offsetting this, it had ₩78.9b in cash and ₩15.4b in receivables that were due within 12 months. So it can boast ₩40.4b more liquid assets than total liabilities.

This surplus suggests that WON TECHLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that WON TECHLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that WON TECHLtd has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, WON TECHLtd produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that WON TECHLtd has net cash of ₩62.2b, as well as more liquid assets than liabilities. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think WON TECHLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with WON TECHLtd (at least 1 which is significant) , and understanding them should be part of your investment process.

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.