Does POINT ENGINEERINGLtd (KOSDAQ:256630) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 POINT ENGINEERING Co.,Ltd. (KOSDAQ:256630) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for POINT ENGINEERINGLtd

How Much Debt Does POINT ENGINEERINGLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 POINT ENGINEERINGLtd had ₩22.7b of debt, an increase on ₩18.3b, over one year. But on the other hand it also has ₩37.7b in cash, leading to a ₩14.9b net cash position.

How Healthy Is POINT ENGINEERINGLtd's Balance Sheet?

According to the last reported balance sheet, POINT ENGINEERINGLtd had liabilities of ₩21.8b due within 12 months, and liabilities of ₩7.77b due beyond 12 months. On the other hand, it had cash of ₩37.7b and ₩9.85b worth of receivables due within a year. So it can boast ₩17.9b more liquid assets than total liabilities.

This surplus suggests that POINT ENGINEERINGLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that POINT ENGINEERINGLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that POINT ENGINEERINGLtd grew its EBIT by 10% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since POINT ENGINEERINGLtd will need earnings to service that debt. 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. While POINT ENGINEERINGLtd 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. During the last two years, POINT ENGINEERINGLtd produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that POINT ENGINEERINGLtd has net cash of ₩14.9b, as well as more liquid assets than liabilities. And it also grew its EBIT by 10% over the last year. So is POINT ENGINEERINGLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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 POINT ENGINEERINGLtd .

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.

If you’re looking to trade POINT ENGINEERINGLtd, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.