Stock Analysis

Does Asia Paper Manufacturing.Co.Ltd (KRX:002310) Have A Healthy Balance Sheet?

KOSE:A002310
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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, Asia Paper Manufacturing.Co.,Ltd (KRX:002310) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Asia Paper Manufacturing.Co.Ltd

What Is Asia Paper Manufacturing.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Asia Paper Manufacturing.Co.Ltd had ₩123.9b of debt in December 2020, down from ₩144.6b, one year before. However, because it has a cash reserve of ₩116.4b, its net debt is less, at about ₩7.52b.

debt-equity-history-analysis
KOSE:A002310 Debt to Equity History April 11th 2021

A Look At Asia Paper Manufacturing.Co.Ltd's Liabilities

Zooming in on the latest balance sheet data, we can see that Asia Paper Manufacturing.Co.Ltd had liabilities of ₩138.4b due within 12 months and liabilities of ₩110.5b due beyond that. On the other hand, it had cash of ₩116.4b and ₩124.6b worth of receivables due within a year. So it has liabilities totalling ₩7.82b more than its cash and near-term receivables, combined.

This state of affairs indicates that Asia Paper Manufacturing.Co.Ltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩438.0b company is struggling for cash, we still think it's worth monitoring its balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Asia Paper Manufacturing.Co.Ltd has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.067 and EBIT of 28.9 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. But the other side of the story is that Asia Paper Manufacturing.Co.Ltd saw its EBIT decline by 7.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is Asia Paper Manufacturing.Co.Ltd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Asia Paper Manufacturing.Co.Ltd produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Asia Paper Manufacturing.Co.Ltd's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its EBIT growth rate. When we consider the range of factors above, it looks like Asia Paper Manufacturing.Co.Ltd is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Asia Paper Manufacturing.Co.Ltd that you should be aware of before investing here.

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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