Is Wooridul Huebrain (KRX:118000) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Wooridul Huebrain Ltd. (KRX:118000) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wooridul Huebrain

What Is Wooridul Huebrain's Net Debt?

As you can see below, at the end of September 2020, Wooridul Huebrain had ₩47.3b of debt, up from ₩38.0b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩60.6b in cash, so it actually has ₩13.3b net cash.

A Look At Wooridul Huebrain's Liabilities

We can see from the most recent balance sheet that Wooridul Huebrain had liabilities of ₩56.5b falling due within a year, and liabilities of ₩1.11b due beyond that. On the other hand, it had cash of ₩60.6b and ₩6.30b worth of receivables due within a year. So it actually has ₩9.29b more liquid assets than total liabilities.

This short term liquidity is a sign that Wooridul Huebrain could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Wooridul Huebrain has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wooridul Huebrain will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Wooridul Huebrain had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₩35b. That makes us nervous, to say the least.

So How Risky Is Wooridul Huebrain?

Although Wooridul Huebrain had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩6.6b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Wooridul Huebrain (3 are significant) 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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