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

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. As with many other companies Wooree E&L Co., Ltd. (KOSDAQ:153490) makes use of debt. 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. 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.

View our latest analysis for Wooree E&L

What Is Wooree E&L's Debt?

As you can see below, Wooree E&L had ₩10.1b of debt at March 2024, down from ₩18.2b a year prior. But it also has ₩45.4b in cash to offset that, meaning it has ₩35.3b net cash.

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

According to the last reported balance sheet, Wooree E&L had liabilities of ₩32.2b due within 12 months, and liabilities of ₩1.36b due beyond 12 months. On the other hand, it had cash of ₩45.4b and ₩31.5b worth of receivables due within a year. So it can boast ₩43.3b more liquid assets than total liabilities.

This surplus strongly suggests that Wooree E&L has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Wooree E&L has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Wooree E&L turned things around in the last 12 months, delivering and EBIT of ₩7.6b. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wooree E&L's earnings that will influence how the balance sheet holds up in the future. 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. 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. Over the last year, Wooree E&L actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wooree E&L has ₩35.3b in net cash and a strong balance sheet. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in ₩10b. So we don't think Wooree E&L's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Wooree E&L .

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.

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