Here's Why Worldex Industry & Trading (KOSDAQ:101160) Can Manage Its Debt Responsibly

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.' 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. Importantly, Worldex Industry & Trading Co., Ltd. (KOSDAQ:101160) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Worldex Industry & Trading

What Is Worldex Industry & Trading's Debt?

The chart below, which you can click on for greater detail, shows that Worldex Industry & Trading had ₩44.9b in debt in September 2024; about the same as the year before. But on the other hand it also has ₩125.0b in cash, leading to a ₩80.2b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Worldex Industry & Trading had liabilities of ₩60.4b due within 12 months and liabilities of ₩19.7b due beyond that. Offsetting this, it had ₩125.0b in cash and ₩51.7b in receivables that were due within 12 months. So it actually has ₩96.6b more liquid assets than total liabilities.

This luscious liquidity implies that Worldex Industry & Trading's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Worldex Industry & Trading boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Worldex Industry & Trading saw its EBIT decline by 5.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Worldex Industry & Trading will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Worldex Industry & Trading's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Worldex Industry & Trading has ₩80.2b in net cash and a decent-looking balance sheet. So is Worldex Industry & Trading's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Worldex Industry & Trading, you may well want to click here to check an interactive graph of its earnings per share history.

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.