Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Cheil Worldwide Inc. (KRX:030000) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Cheil Worldwide's Debt?
The chart below, which you can click on for greater detail, shows that Cheil Worldwide had ₩14.1b in debt in December 2020; about the same as the year before. However, it does have ₩565.3b in cash offsetting this, leading to net cash of ₩551.1b.
How Strong Is Cheil Worldwide's Balance Sheet?
We can see from the most recent balance sheet that Cheil Worldwide had liabilities of ₩1.06t falling due within a year, and liabilities of ₩163.0b due beyond that. On the other hand, it had cash of ₩565.3b and ₩1.04t worth of receivables due within a year. So it actually has ₩382.8b more liquid assets than total liabilities.
This excess liquidity suggests that Cheil Worldwide is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Cheil Worldwide boasts net cash, so it's fair to say it does not have a heavy debt load!
While Cheil Worldwide doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cheil Worldwide can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cheil Worldwide 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, Cheil Worldwide recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Cheil Worldwide has net cash of ₩551.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in ₩204b. So we don't think Cheil Worldwide's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Cheil Worldwide's dividend history, without delay!
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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