These 4 Measures Indicate That Wooree E&L (KOSDAQ:153490) Is Using Debt Reasonably Well

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.' 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. Importantly, Wooree E&L Co., Ltd. (KOSDAQ:153490) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Wooree E&L

What Is Wooree E&L's Net Debt?

As you can see below, Wooree E&L had ₩11.9b of debt at September 2020, down from ₩16.4b a year prior. However, it does have ₩23.0b in cash offsetting this, leading to net cash of ₩11.1b.

How Strong Is Wooree E&L's Balance Sheet?

We can see from the most recent balance sheet that Wooree E&L had liabilities of ₩41.8b falling due within a year, and liabilities of ₩1.12b due beyond that. Offsetting these obligations, it had cash of ₩23.0b as well as receivables valued at ₩60.1b due within 12 months. So it can boast ₩40.2b more liquid assets than total liabilities.

This excess liquidity is a great indication that Wooree E&L's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Wooree E&L boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Wooree E&L's EBIT was down 58% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wooree E&L's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wooree E&L 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. Happily for any shareholders, Wooree E&L actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wooree E&L has net cash of ₩11.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩21b, being 329% of its EBIT. So is Wooree E&L's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Wooree E&L you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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