We Think Wonik Ips (KOSDAQ:240810) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Wonik Ips Co., Ltd (KOSDAQ:240810) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wonik Ips

What Is Wonik Ips's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Wonik Ips had debt of ₩15.0b, up from ₩9.94b in one year. But on the other hand it also has ₩234.6b in cash, leading to a ₩219.6b net cash position.

How Strong Is Wonik Ips's Balance Sheet?

According to the last reported balance sheet, Wonik Ips had liabilities of ₩613.9b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. Offsetting this, it had ₩234.6b in cash and ₩93.5b in receivables that were due within 12 months. So its liabilities total ₩296.0b more than the combination of its cash and short-term receivables.

Of course, Wonik Ips has a market capitalization of ₩1.76t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Wonik Ips also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Wonik Ips's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Wonik Ips can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wonik Ips 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. During the last three years, Wonik Ips produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Wonik Ips's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩219.6b. And it impressed us with free cash flow of ₩185b, being 72% of its EBIT. So we are not troubled with Wonik Ips's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Wonik Ips, you may well want to click here to check an interactive graph of its earnings per share history.

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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