Taekwang Industrial (KRX:003240) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Taekwang Industrial Co., Ltd. (KRX:003240) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Taekwang Industrial

What Is Taekwang Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Taekwang Industrial had debt of ₩89.4b at the end of December 2020, a reduction from ₩95.8b over a year. But it also has ₩1.21t in cash to offset that, meaning it has ₩1.12t net cash.

How Strong Is Taekwang Industrial's Balance Sheet?

According to the last reported balance sheet, Taekwang Industrial had liabilities of ₩371.9b due within 12 months, and liabilities of ₩353.1b due beyond 12 months. Offsetting these obligations, it had cash of ₩1.21t as well as receivables valued at ₩285.2b due within 12 months. So it can boast ₩767.9b more liquid assets than total liabilities.

This luscious liquidity implies that Taekwang Industrial's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Taekwang Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Taekwang Industrial if management cannot prevent a repeat of the 72% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Taekwang Industrial 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 three years, Taekwang Industrial generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Taekwang Industrial has net cash of ₩1.12t, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in ₩8.5b. So is Taekwang Industrial's debt a risk? It doesn't seem so to us. 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 Taekwang Industrial'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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