Is WIZIT (KOSDAQ:036090) Using Too Much Debt?

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. We can see that WIZIT Co., Ltd. (KOSDAQ:036090) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. 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.

See our latest analysis for WIZIT

What Is WIZIT's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 WIZIT had ₩35.8b of debt, an increase on ₩11.8b, over one year. But it also has ₩53.7b in cash to offset that, meaning it has ₩17.9b net cash.

How Healthy Is WIZIT's Balance Sheet?

According to the last reported balance sheet, WIZIT had liabilities of ₩84.7b due within 12 months, and liabilities of ₩9.52b due beyond 12 months. On the other hand, it had cash of ₩53.7b and ₩43.4b worth of receivables due within a year. So it can boast ₩2.92b more liquid assets than total liabilities.

This surplus suggests that WIZIT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WIZIT boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that WIZIT grew its EBIT by 319% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since WIZIT will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While WIZIT 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. In the last three years, WIZIT created free cash flow amounting to 5.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case WIZIT has ₩17.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 319% year-on-year EBIT growth. So we don't think WIZIT's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for WIZIT (of which 1 is a bit unpleasant!) you should know about.

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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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.

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