We Think Wooree E&L (KOSDAQ:153490) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Wooree E&L Co., Ltd. (KOSDAQ:153490) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wooree E&L

How Much Debt Does Wooree E&L Carry?

The image below, which you can click on for greater detail, shows that Wooree E&L had debt of ₩7.98b at the end of June 2024, a reduction from ₩18.1b over a year. However, its balance sheet shows it holds ₩46.7b in cash, so it actually has ₩38.7b net cash.

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

The latest balance sheet data shows that Wooree E&L had liabilities of ₩32.8b due within a year, and liabilities of ₩1.12b falling due after that. On the other hand, it had cash of ₩46.7b and ₩35.4b worth of receivables due within a year. So it can boast ₩48.1b more liquid assets than total liabilities.

This surplus liquidity suggests that Wooree E&L's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 ₩10b. 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. 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 we empathize with investors who find debt concerning, the bottom line is that Wooree E&L has net cash of ₩38.7b and plenty of liquid assets. And it impressed us with free cash flow of ₩12b, being 119% of its EBIT. So is Wooree E&L's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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.