Is Taekwang Industrial (KRX:003240) Weighed On By Its Debt Load?

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. We note that Taekwang Industrial Co., Ltd. (KRX:003240) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Taekwang Industrial

What Is Taekwang Industrial's Debt?

The chart below, which you can click on for greater detail, shows that Taekwang Industrial had ₩78.8b in debt in September 2024; about the same as the year before. But on the other hand it also has ₩1.35t in cash, leading to a ₩1.27t net cash position.

How Healthy Is Taekwang Industrial's Balance Sheet?

According to the last reported balance sheet, Taekwang Industrial had liabilities of ₩413.1b due within 12 months, and liabilities of ₩274.6b due beyond 12 months. On the other hand, it had cash of ₩1.35t and ₩371.7b worth of receivables due within a year. So it can boast ₩1.03t more liquid assets than total liabilities.

This surplus strongly suggests that Taekwang Industrial has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Taekwang Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taekwang Industrial'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.

Over 12 months, Taekwang Industrial made a loss at the EBIT level, and saw its revenue drop to ₩2.2t, which is a fall of 3.9%. That's not what we would hope to see.

So How Risky Is Taekwang Industrial?

Although Taekwang Industrial had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩49b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Taekwang Industrial (1 is a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.