Is Worldex Industry & Trading (KOSDAQ:101160) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Worldex Industry & Trading Co., Ltd. (KOSDAQ:101160) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Worldex Industry & Trading

How Much Debt Does Worldex Industry & Trading Carry?

As you can see below, Worldex Industry & Trading had ₩41.9b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩47.5b in cash to offset that, meaning it has ₩5.53b net cash.

A Look At Worldex Industry & Trading's Liabilities

Zooming in on the latest balance sheet data, we can see that Worldex Industry & Trading had liabilities of ₩43.1b due within 12 months 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 actually has ₩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. Succinctly put, Worldex Industry & Trading boasts net cash, so it's fair to say it does not have a heavy debt load!

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 it is future earnings, more than anything, that will determine Worldex Industry & Trading's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Worldex Industry & Trading is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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