We Think OHEIM& CompanyLtd (KOSDAQ:309930) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies OHEIM& Company Co.,Ltd. (KOSDAQ:309930) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for OHEIM& CompanyLtd

How Much Debt Does OHEIM& CompanyLtd Carry?

As you can see below, at the end of June 2024, OHEIM& CompanyLtd had ₩11.0b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩40.1b in cash, leading to a ₩29.1b net cash position.

A Look At OHEIM& CompanyLtd's Liabilities

The latest balance sheet data shows that OHEIM& CompanyLtd had liabilities of ₩23.8b due within a year, and liabilities of ₩6.10b falling due after that. Offsetting these obligations, it had cash of ₩40.1b as well as receivables valued at ₩3.72b due within 12 months. So it actually has ₩13.9b more liquid assets than total liabilities.

This surplus strongly suggests that OHEIM& CompanyLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that OHEIM& CompanyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, OHEIM& CompanyLtd's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since OHEIM& CompanyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. OHEIM& CompanyLtd 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. Over the last three years, OHEIM& CompanyLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case OHEIM& CompanyLtd has ₩29.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in ₩1.1b. So we don't think OHEIM& CompanyLtd's use of debt is risky. 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 OHEIM& CompanyLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.