These 4 Measures Indicate That WONIK MaterialsLtd (KOSDAQ:104830) Is Using Debt Reasonably Well

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, WONIK Materials Co.,Ltd. (KOSDAQ:104830) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for WONIK MaterialsLtd

What Is WONIK MaterialsLtd's Debt?

As you can see below, WONIK MaterialsLtd had ₩26.9b of debt at March 2024, down from ₩83.1b a year prior. But on the other hand it also has ₩64.6b in cash, leading to a ₩37.6b net cash position.

How Healthy Is WONIK MaterialsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WONIK MaterialsLtd had liabilities of ₩56.0b due within 12 months and liabilities of ₩2.61b due beyond that. On the other hand, it had cash of ₩64.6b and ₩34.6b worth of receivables due within a year. So it can boast ₩40.6b more liquid assets than total liabilities.

This surplus suggests that WONIK MaterialsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WONIK MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for WONIK MaterialsLtd if management cannot prevent a repeat of the 66% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WONIK MaterialsLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WONIK MaterialsLtd 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, WONIK MaterialsLtd reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case WONIK MaterialsLtd has ₩37.6b in net cash and a decent-looking balance sheet. So we are not troubled with WONIK MaterialsLtd'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. For example - WONIK MaterialsLtd has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com