Is WINPAC (KOSDAQ:097800) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that WINPAC Inc. (KOSDAQ:097800) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 4 warning signs about WINPAC. View them for free.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is WINPAC's Debt?

You can click the graphic below for the historical numbers, but it shows that WINPAC had ₩65.1b of debt in December 2024, down from ₩82.6b, one year before. However, because it has a cash reserve of ₩8.22b, its net debt is less, at about ₩56.8b.

How Healthy Is WINPAC's Balance Sheet?

According to the last reported balance sheet, WINPAC had liabilities of ₩71.1b due within 12 months, and liabilities of ₩5.89b due beyond 12 months. On the other hand, it had cash of ₩8.22b and ₩6.38b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩62.4b.

Given this deficit is actually higher than the company's market capitalization of ₩58.3b, we think shareholders really should watch WINPAC's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is WINPAC's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for WINPAC

Over 12 months, WINPAC made a loss at the EBIT level, and saw its revenue drop to ₩74b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While WINPAC's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩23b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩23b in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. Case in point: We've spotted 4 warning signs for WINPAC you should be aware of, and 3 of them don't sit too well with us.

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.