Is Woongjin Thinkbig (KRX:095720) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Woongjin Thinkbig Co., Ltd. (KRX:095720) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Woongjin Thinkbig

How Much Debt Does Woongjin Thinkbig Carry?

The image below, which you can click on for greater detail, shows that Woongjin Thinkbig had debt of ₩80.0b at the end of September 2020, a reduction from ₩1.55t over a year. But it also has ₩91.0b in cash to offset that, meaning it has ₩11.0b net cash.

How Strong Is Woongjin Thinkbig's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Woongjin Thinkbig had liabilities of ₩233.7b due within 12 months and liabilities of ₩9.20b due beyond that. On the other hand, it had cash of ₩91.0b and ₩120.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩31.5b.

Since publicly traded Woongjin Thinkbig shares are worth a total of ₩334.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Woongjin Thinkbig also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Woongjin Thinkbig's EBIT was down 26% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Woongjin Thinkbig 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Woongjin Thinkbig 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. Happily for any shareholders, Woongjin Thinkbig actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Woongjin Thinkbig has ₩11.0b in net cash. And it impressed us with free cash flow of ₩7.6b, being 101% of its EBIT. So we are not troubled with Woongjin Thinkbig's debt use. 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. For example, we've discovered 1 warning sign for Woongjin Thinkbig that you should be aware of before investing here.

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.

When trading Woongjin Thinkbig or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.