Is Miwon Specialty Chemical (KRX:268280) A Risky Investment?

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. We can see that Miwon Specialty Chemical Co., Ltd. (KRX:268280) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Miwon Specialty Chemical

What Is Miwon Specialty Chemical's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Miwon Specialty Chemical had debt of ₩12.5b, up from ₩12.0b in one year. But it also has ₩65.9b in cash to offset that, meaning it has ₩53.4b net cash.

A Look At Miwon Specialty Chemical's Liabilities

The latest balance sheet data shows that Miwon Specialty Chemical had liabilities of ₩29.9b due within a year, and liabilities of ₩23.2b falling due after that. Offsetting this, it had ₩65.9b in cash and ₩76.7b in receivables that were due within 12 months. So it actually has ₩89.6b more liquid assets than total liabilities.

This surplus suggests that Miwon Specialty Chemical is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Miwon Specialty Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Miwon Specialty Chemical grew its EBIT at 11% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is Miwon Specialty Chemical'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. Miwon Specialty Chemical 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. Over the last two years, Miwon Specialty Chemical recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Miwon Specialty Chemical has net cash of ₩53.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩58b, being 87% of its EBIT. So we don't think Miwon Specialty Chemical's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Miwon Specialty Chemical you should be aware of, and 1 of them is a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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