Does Osung Advanced Materials (KOSDAQ:052420) Have A Healthy Balance Sheet?

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.' 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. We can see that Osung Advanced Materials Co., Ltd. (KOSDAQ:052420) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Osung Advanced Materials

What Is Osung Advanced Materials's Debt?

As you can see below, at the end of September 2020, Osung Advanced Materials had ₩54.3b of debt, up from ₩37.1b a year ago. Click the image for more detail. But it also has ₩70.9b in cash to offset that, meaning it has ₩16.6b net cash.

A Look At Osung Advanced Materials' Liabilities

The latest balance sheet data shows that Osung Advanced Materials had liabilities of ₩23.5b due within a year, and liabilities of ₩40.9b falling due after that. On the other hand, it had cash of ₩70.9b and ₩24.9b worth of receivables due within a year. So it can boast ₩31.4b more liquid assets than total liabilities.

This surplus suggests that Osung Advanced Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Osung Advanced Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Osung Advanced Materials grew its EBIT by 322% 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 Osung Advanced Materials 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Osung Advanced Materials 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 last three years, Osung Advanced Materials saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Osung Advanced Materials has net cash of ₩16.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 322% over the last year. So we don't have any problem with Osung Advanced Materials's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Osung Advanced Materials 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.

When trading Osung Advanced Materials or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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