We Think Innocean Worldwide (KRX:214320) Can Stay On Top Of Its 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. We can see that Innocean Worldwide Inc. (KRX:214320) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Innocean Worldwide

What Is Innocean Worldwide's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Innocean Worldwide had debt of ₩8.31b, up from ₩10.0m in one year. However, it does have ₩679.2b in cash offsetting this, leading to net cash of ₩670.9b.

How Strong Is Innocean Worldwide's Balance Sheet?

The latest balance sheet data shows that Innocean Worldwide had liabilities of ₩953.3b due within a year, and liabilities of ₩219.3b falling due after that. On the other hand, it had cash of ₩679.2b and ₩196.6b worth of receivables due within a year. So its liabilities total ₩296.9b more than the combination of its cash and short-term receivables.

Innocean Worldwide has a market capitalization of ₩1.22t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Innocean Worldwide also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Innocean Worldwide saw its EBIT drop by 5.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Innocean Worldwide recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Innocean Worldwide does have more liabilities than liquid assets, it also has net cash of ₩670.9b. And it impressed us with free cash flow of ₩244b, being 80% of its EBIT. So we don't have any problem with Innocean Worldwide's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Innocean Worldwide .

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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