Does Winhitech (KOSDAQ:192390) Have A Healthy Balance Sheet?

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.' 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, Winhitech Co., Ltd. (KOSDAQ:192390) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Winhitech

What Is Winhitech's Debt?

You can click the graphic below for the historical numbers, but it shows that Winhitech had ₩29.8b of debt in September 2020, down from ₩56.6b, one year before. However, because it has a cash reserve of ₩17.6b, its net debt is less, at about ₩12.1b.

How Healthy Is Winhitech's Balance Sheet?

We can see from the most recent balance sheet that Winhitech had liabilities of ₩35.2b falling due within a year, and liabilities of ₩10.7b due beyond that. On the other hand, it had cash of ₩17.6b and ₩14.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.7b.

Winhitech has a market capitalization of ₩35.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Winhitech'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.

In the last year Winhitech had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩77b. We would much prefer see growth.

Caveat Emptor

While Winhitech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩11b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩5.3b into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Winhitech (1 is concerning!) that you should be aware of before investing here.

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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