Here's Why WONIK MaterialsLtd (KOSDAQ:104830) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, WONIK Materials Co.,Ltd. (KOSDAQ:104830) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for WONIK MaterialsLtd

What Is WONIK MaterialsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 WONIK MaterialsLtd had ₩29.8b of debt, an increase on ₩24.9b, over one year. But it also has ₩59.2b in cash to offset that, meaning it has ₩29.4b net cash.

How Healthy Is WONIK MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that WONIK MaterialsLtd had liabilities of ₩61.0b due within a year, and liabilities of ₩2.54b falling due after that. Offsetting this, it had ₩59.2b in cash and ₩17.3b in receivables that were due within 12 months. So it actually has ₩13.0b more liquid assets than total liabilities.

This short term liquidity is a sign that WONIK MaterialsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, WONIK MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that WONIK MaterialsLtd grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WONIK MaterialsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. WONIK MaterialsLtd 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. Considering the last three years, WONIK MaterialsLtd actually recorded a cash outflow, overall. 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 it is always sensible to investigate a company's debt, in this case WONIK MaterialsLtd has ₩29.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with WONIK MaterialsLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of WONIK MaterialsLtd's earnings per share history for free.

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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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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