These 4 Measures Indicate That Innocean Worldwide (KRX:214320) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Innocean Worldwide Inc. (KRX:214320) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Innocean Worldwide

How Much Debt Does Innocean Worldwide Carry?

The image below, which you can click on for greater detail, shows that Innocean Worldwide had debt of ₩8.37b at the end of December 2020, a reduction from ₩10.4b over a year. But on the other hand it also has ₩596.2b in cash, leading to a ₩587.8b net cash position.

How Strong Is Innocean Worldwide's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Innocean Worldwide had liabilities of ₩1.05t due within 12 months and liabilities of ₩208.2b due beyond that. Offsetting this, it had ₩596.2b in cash and ₩268.0b in receivables that were due within 12 months. So it has liabilities totalling ₩395.8b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Innocean Worldwide has a market capitalization of ₩1.21t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Innocean Worldwide boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Innocean Worldwide saw its EBIT drop by 8.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Innocean Worldwide's ability to maintain a healthy balance sheet going forward. 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. While Innocean 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. During the last three years, Innocean Worldwide produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Innocean Worldwide's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩587.8b. So we don't have any problem with Innocean Worldwide's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Innocean Worldwide that you should be aware of.

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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