Pum-Tech Korea (KOSDAQ:251970) Has A Pretty 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Pum-Tech Korea Co., Ltd (KOSDAQ:251970) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pum-Tech Korea

What Is Pum-Tech Korea's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Pum-Tech Korea had debt of ₩27.8b, up from ₩18.2b in one year. However, it does have ₩113.7b in cash offsetting this, leading to net cash of ₩85.9b.

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

The latest balance sheet data shows that Pum-Tech Korea had liabilities of ₩47.3b due within a year, and liabilities of ₩18.0b falling due after that. Offsetting this, it had ₩113.7b in cash and ₩28.0b in receivables that were due within 12 months. So it actually has ₩76.4b more liquid assets than total liabilities.

This surplus strongly suggests that Pum-Tech Korea has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Pum-Tech Korea boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Pum-Tech Korea has increased its EBIT by 8.1% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Pum-Tech Korea will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last two years, Pum-Tech Korea reported free cash flow worth 4.5% 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 we empathize with investors who find debt concerning, you should keep in mind that Pum-Tech Korea has net cash of ₩85.9b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 8.1% in the last twelve months. So is Pum-Tech Korea's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 3 warning signs we've spotted with Pum-Tech Korea (including 1 which can't be ignored) .

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. 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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