Worldex Industry & Trading (KOSDAQ:101160) Seems To Use Debt Quite Sensibly

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

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Worldex Industry & Trading

What Is Worldex Industry & Trading's Net Debt?

As you can see below, Worldex Industry & Trading had ₩43.2b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩126.4b in cash, leading to a ₩83.2b 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 ₩65.3b falling due within a year, and liabilities of ₩20.3b due beyond that. Offsetting this, it had ₩126.4b in cash and ₩48.5b in receivables that were due within 12 months. So it can boast ₩89.3b more liquid assets than total liabilities.

This surplus suggests that Worldex Industry & Trading is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Worldex Industry & Trading boasts net cash, so it's fair to say it does not have a heavy debt load!

While Worldex Industry & Trading doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 company can only pay off debt with cold hard cash, not accounting profits. While Worldex Industry & Trading has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Worldex Industry & Trading's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Worldex Industry & Trading has ₩83.2b 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. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Worldex Industry & Trading's earnings per share history for free.

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. 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.