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NewtreeLtd (KOSDAQ:270870) Seems To Use Debt Quite Sensibly
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.' 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 Newtree Co.,Ltd. (KOSDAQ:270870) makes use of 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for NewtreeLtd
How Much Debt Does NewtreeLtd Carry?
The image below, which you can click on for greater detail, shows that at September 2020 NewtreeLtd had debt of ₩10.0b, up from ₩13.1m in one year. But it also has ₩31.7b in cash to offset that, meaning it has ₩21.7b net cash.
A Look At NewtreeLtd's Liabilities
According to the last reported balance sheet, NewtreeLtd had liabilities of ₩21.5b due within 12 months, and liabilities of ₩11.9b due beyond 12 months. Offsetting this, it had ₩31.7b in cash and ₩10.7b in receivables that were due within 12 months. So it actually has ₩8.92b more liquid assets than total liabilities.
This short term liquidity is a sign that NewtreeLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NewtreeLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, NewtreeLtd grew its EBIT by 202% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NewtreeLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NewtreeLtd 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. Over the last three years, NewtreeLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that NewtreeLtd has net cash of ₩21.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 202% year-on-year EBIT growth. So we are not troubled with NewtreeLtd's debt use. 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 1 warning sign for NewtreeLtd that you should be aware of.
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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About KOSDAQ:A270870
Newtree
Provides health and beauty products in South Korea, China, and the United States.
Excellent balance sheet average dividend payer.