Vissem Electronics (KOSDAQ:072950) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Vissem Electronics Co., Ltd. (KOSDAQ:072950) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vissem Electronics

How Much Debt Does Vissem Electronics Carry?

As you can see below, at the end of December 2020, Vissem Electronics had ₩8.48b of debt, up from none a year ago. Click the image for more detail. But it also has ₩25.2b in cash to offset that, meaning it has ₩16.7b net cash.

How Healthy Is Vissem Electronics' Balance Sheet?

According to the last reported balance sheet, Vissem Electronics had liabilities of ₩12.4b due within 12 months, and liabilities of ₩4.77b due beyond 12 months. Offsetting this, it had ₩25.2b in cash and ₩9.10b in receivables that were due within 12 months. So it actually has ₩17.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Vissem Electronics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Vissem Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Vissem Electronics if management cannot prevent a repeat of the 42% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Vissem Electronics's earnings that will influence how the balance sheet holds up in the future. 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. Vissem Electronics 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, Vissem Electronics actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Vissem Electronics has net cash of ₩16.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 307% of that EBIT to free cash flow, bringing in ₩3.9b. So is Vissem Electronics's debt a risk? It doesn't seem so to us. 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. We've identified 4 warning signs with Vissem Electronics (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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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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.
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