We Think Mohenz.Co.Ltd (KOSDAQ:006920) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Mohenz.Co.,Ltd. (KOSDAQ:006920) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mohenz.Co.Ltd

What Is Mohenz.Co.Ltd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Mohenz.Co.Ltd had debt of ₩2.00b, up from none in one year. But on the other hand it also has ₩2.53b in cash, leading to a ₩531.3m net cash position.

How Strong Is Mohenz.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Mohenz.Co.Ltd had liabilities of ₩14.5b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. On the other hand, it had cash of ₩2.53b and ₩18.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.56b.

Given Mohenz.Co.Ltd has a market capitalization of ₩56.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Mohenz.Co.Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Mohenz.Co.Ltd saw substantial negative free cash flow, in total. 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 are not troubled with Mohenz.Co.Ltd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mohenz.Co.Ltd is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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