Does Miwon Chemicals (KRX:134380) Have A Healthy Balance Sheet?

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. As with many other companies Miwon Chemicals Co., Ltd. (KRX:134380) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Miwon Chemicals

What Is Miwon Chemicals's Debt?

As you can see below, at the end of September 2020, Miwon Chemicals had ₩2.08b of debt, up from ₩1.60b a year ago. Click the image for more detail. But on the other hand it also has ₩12.9b in cash, leading to a ₩10.9b net cash position.

How Strong Is Miwon Chemicals's Balance Sheet?

The latest balance sheet data shows that Miwon Chemicals had liabilities of ₩19.7b due within a year, and liabilities of ₩7.07b falling due after that. On the other hand, it had cash of ₩12.9b and ₩27.5b worth of receivables due within a year. So it can boast ₩13.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Miwon Chemicals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Miwon Chemicals boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Miwon Chemicals has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Miwon Chemicals'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Miwon Chemicals 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. Considering the last three years, Miwon Chemicals actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Miwon Chemicals has net cash of ₩10.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't think Miwon Chemicals's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Miwon Chemicals, you may well want to click here to check an interactive graph of its earnings per share history.

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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