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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Woongjin Thinkbig Co., Ltd. (KRX:095720) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Woongjin Thinkbig

What Is Woongjin Thinkbig's Debt?

As you can see below, Woongjin Thinkbig had ₩80.0b of debt at December 2020, down from ₩1.61t a year prior. But it also has ₩95.6b in cash to offset that, meaning it has ₩15.6b net cash.

How Strong Is Woongjin Thinkbig's Balance Sheet?

The latest balance sheet data shows that Woongjin Thinkbig had liabilities of ₩275.5b due within a year, and liabilities of ₩5.30b falling due after that. Offsetting this, it had ₩95.6b in cash and ₩140.1b in receivables that were due within 12 months. So it has liabilities totalling ₩45.1b more than its cash and near-term receivables, combined.

Of course, Woongjin Thinkbig has a market capitalization of ₩449.4b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Importantly, Woongjin Thinkbig's EBIT fell a jaw-dropping 35% in the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Woongjin Thinkbig does have more liabilities than liquid assets, it also has net cash of ₩15.6b. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in ₩28b. So we don't have any problem with Woongjin Thinkbig's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Woongjin Thinkbig that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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