Here's Why Pum-Tech Korea (KOSDAQ:251970) Can Manage Its Debt Responsibly

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. As with many other companies Pum-Tech Korea Co., Ltd (KOSDAQ:251970) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pum-Tech Korea

What Is Pum-Tech Korea's Net Debt?

As you can see below, Pum-Tech Korea had ₩25.1b of debt at December 2020, down from ₩48.2b a year prior. However, its balance sheet shows it holds ₩108.2b in cash, so it actually has ₩83.2b net cash.

How Healthy Is Pum-Tech Korea's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pum-Tech Korea had liabilities of ₩55.9b due within 12 months and liabilities of ₩6.52b due beyond that. Offsetting this, it had ₩108.2b in cash and ₩28.0b in receivables that were due within 12 months. So it actually has ₩73.8b more liquid assets than total liabilities.

This excess liquidity is a great indication that Pum-Tech Korea's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Pum-Tech Korea has more cash than debt is arguably a good indication that it can manage its debt safely.

While Pum-Tech Korea doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pum-Tech Korea'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pum-Tech Korea 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 two years, Pum-Tech Korea 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 we empathize with investors who find debt concerning, you should keep in mind that Pum-Tech Korea has net cash of ₩83.2b, as well as more liquid assets than liabilities. So we don't have any problem with Pum-Tech Korea's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Pum-Tech Korea you should be aware of, and 1 of them is a bit unpleasant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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