OCI (KRX:010060) Is Carrying A Fair Bit Of Debt

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.' 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 note that OCI Company Ltd. (KRX:010060) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for OCI

What Is OCI's Net Debt?

The chart below, which you can click on for greater detail, shows that OCI had ₩1.50t in debt in September 2020; about the same as the year before. On the flip side, it has ₩608.2b in cash leading to net debt of about ₩896.7b.

How Healthy Is OCI's Balance Sheet?

The latest balance sheet data shows that OCI had liabilities of ₩848.8b due within a year, and liabilities of ₩1.10t falling due after that. Offsetting these obligations, it had cash of ₩608.2b as well as receivables valued at ₩326.5b due within 12 months. So it has liabilities totalling ₩1.02t more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since OCI has a market capitalization of ₩2.55t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine OCI's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year OCI had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩2.1t. To be frank that doesn't bode well.

Caveat Emptor

While OCI's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩188b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩160b of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for OCI you should know about.

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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