Is Miwon Commercial (KRX:002840) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Miwon Commercial Co., Ltd. (KRX:002840) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Miwon Commercial

How Much Debt Does Miwon Commercial Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Miwon Commercial had ₩7.44b of debt, an increase on ₩6.02b, over one year. However, it does have ₩8.78b in cash offsetting this, leading to net cash of ₩1.34b.

How Strong Is Miwon Commercial's Balance Sheet?

According to the last reported balance sheet, Miwon Commercial had liabilities of ₩35.7b due within 12 months, and liabilities of ₩23.6b due beyond 12 months. On the other hand, it had cash of ₩8.78b and ₩54.0b worth of receivables due within a year. So it actually has ₩3.44b more liquid assets than total liabilities.

This state of affairs indicates that Miwon Commercial's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩651.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Miwon Commercial has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Miwon Commercial has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Miwon Commercial will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Miwon Commercial 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, Miwon Commercial recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Miwon Commercial has ₩1.34b in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So we are not troubled with Miwon Commercial's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Miwon Commercial's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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