Shindaeyang Paper (KRX:016590) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shindaeyang Paper Co., Ltd. (KRX:016590) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shindaeyang Paper

How Much Debt Does Shindaeyang Paper Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Shindaeyang Paper had debt of ₩99.4b, up from ₩93.0b in one year. However, it does have ₩138.9b in cash offsetting this, leading to net cash of ₩39.5b.

How Strong Is Shindaeyang Paper's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shindaeyang Paper had liabilities of ₩112.4b due within 12 months and liabilities of ₩96.7b due beyond that. Offsetting these obligations, it had cash of ₩138.9b as well as receivables valued at ₩103.4b due within 12 months. So it can boast ₩33.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Shindaeyang Paper could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shindaeyang Paper has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shindaeyang Paper's load is not too heavy, because its EBIT was down 23% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shindaeyang Paper will need earnings to service that debt. 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. Shindaeyang Paper may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shindaeyang Paper generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Shindaeyang Paper has ₩39.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₩74b. So we are not troubled with Shindaeyang Paper's debt use. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Shindaeyang Paper you should know about.

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. 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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