We Think Shindaeyang Paper (KRX:016590) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shindaeyang Paper Co., Ltd. (KRX:016590) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shindaeyang Paper

How Much Debt Does Shindaeyang Paper Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Shindaeyang Paper had ₩100.2b of debt, an increase on ₩79.5b, over one year. But on the other hand it also has ₩137.4b in cash, leading to a ₩37.2b net cash position.

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 ₩120.6b due within 12 months and liabilities of ₩95.4b due beyond that. Offsetting these obligations, it had cash of ₩137.4b as well as receivables valued at ₩106.4b due within 12 months. So it can boast ₩27.8b 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. Succinctly put, Shindaeyang Paper boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shindaeyang Paper if management cannot prevent a repeat of the 27% 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 Shindaeyang Paper'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 company can only pay off debt with cold hard cash, not accounting profits. While Shindaeyang Paper 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, Shindaeyang Paper recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Shindaeyang Paper has ₩37.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₩58b. So we are not troubled with Shindaeyang Paper's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shindaeyang Paper you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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