Here's Why Miwon Specialty Chemical (KRX:268280) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Miwon Specialty Chemical Co., Ltd. (KRX:268280) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Miwon Specialty Chemical

How Much Debt Does Miwon Specialty Chemical Carry?

The image below, which you can click on for greater detail, shows that Miwon Specialty Chemical had debt of ₩34.3b at the end of March 2024, a reduction from ₩36.4b over a year. But on the other hand it also has ₩107.4b in cash, leading to a ₩73.1b net cash position.

How Healthy Is Miwon Specialty Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Miwon Specialty Chemical had liabilities of ₩86.8b due within 12 months and liabilities of ₩17.1b due beyond that. Offsetting these obligations, it had cash of ₩107.4b as well as receivables valued at ₩105.6b due within 12 months. So it actually has ₩109.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Miwon Specialty Chemical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Miwon Specialty Chemical 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 Miwon Specialty Chemical if management cannot prevent a repeat of the 50% 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 Miwon Specialty Chemical's earnings that will influence how the balance sheet holds up in the future. 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. While Miwon Specialty Chemical 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. Looking at the most recent three years, Miwon Specialty Chemical recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Miwon Specialty Chemical has ₩73.1b in net cash and a decent-looking balance sheet. So we don't have any problem with Miwon Specialty Chemical's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Miwon Specialty Chemical .

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.