Does Worldex Industry & Trading (KOSDAQ:101160) Have A Healthy Balance Sheet?

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. We can see that Worldex Industry & Trading Co., Ltd. (KOSDAQ:101160) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Worldex Industry & Trading

What Is Worldex Industry & Trading's Net Debt?

The chart below, which you can click on for greater detail, shows that Worldex Industry & Trading had ₩41.9b in debt in September 2020; about the same as the year before. But on the other hand it also has ₩47.5b in cash, leading to a ₩5.53b net cash position.

How Strong Is Worldex Industry & Trading's Balance Sheet?

We can see from the most recent balance sheet that Worldex Industry & Trading had liabilities of ₩43.1b falling due within a year, and liabilities of ₩22.8b due beyond that. On the other hand, it had cash of ₩47.5b and ₩26.6b worth of receivables due within a year. So it can boast ₩8.17b more liquid assets than total liabilities.

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

On top of that, Worldex Industry & Trading grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Worldex Industry & Trading can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Worldex Industry & Trading 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 most recent three years, Worldex Industry & Trading recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Worldex Industry & Trading has net cash of ₩5.53b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 40% over the last year. So we don't think Worldex Industry & Trading'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. Take risks, for example - Worldex Industry & Trading has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade Worldex Industry & Trading, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade 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@simplywallst.com.