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, Mohenz.Co.,Ltd. (KOSDAQ:006920) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Mohenz.Co.Ltd
What Is Mohenz.Co.Ltd's Debt?
As you can see below, at the end of September 2020, Mohenz.Co.Ltd had ₩2.00b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩2.53b in cash, leading to a ₩531.3m net cash position.
How Healthy Is Mohenz.Co.Ltd's Balance Sheet?
The latest balance sheet data shows that Mohenz.Co.Ltd had liabilities of ₩14.5b due within a year, and liabilities of ₩10.2b falling due after that. On the other hand, it had cash of ₩2.53b and ₩18.6b worth of receivables due within a year. So it has liabilities totalling ₩3.56b more than its cash and near-term receivables, combined.
Given Mohenz.Co.Ltd has a market capitalization of ₩55.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Mohenz.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Mohenz.Co.Ltd saw its EBIT drop by 5.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mohenz.Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mohenz.Co.Ltd 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. During the last three years, Mohenz.Co.Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Mohenz.Co.Ltd has ₩531.3m in net cash. So we don't have any problem with Mohenz.Co.Ltd's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Mohenz.Co.Ltd (including 1 which is is concerning) .
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. 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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About KOSDAQ:A006920
Mohenz.Co.Ltd
Produces and supplies ready-mixed concrete for the construction industry in South Korea.
Flawless balance sheet with questionable track record.
