Is WITHTECH (KOSDAQ:348350) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that WITHTECH Co., LTD. (KOSDAQ:348350) does have debt on its balance sheet. But is this debt a concern to shareholders?

We've discovered 2 warning signs about WITHTECH. View them for free.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is WITHTECH's Debt?

The chart below, which you can click on for greater detail, shows that WITHTECH had ₩12.3b in debt in December 2024; about the same as the year before. However, its balance sheet shows it holds ₩76.3b in cash, so it actually has ₩64.0b net cash.

How Healthy Is WITHTECH's Balance Sheet?

The latest balance sheet data shows that WITHTECH had liabilities of ₩19.5b due within a year, and liabilities of ₩212.1m falling due after that. On the other hand, it had cash of ₩76.3b and ₩5.43b worth of receivables due within a year. So it actually has ₩62.0b more liquid assets than total liabilities.

This surplus strongly suggests that WITHTECH 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 WITHTECH has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for WITHTECH

In fact WITHTECH's saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since WITHTECH will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WITHTECH 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. In the last three years, WITHTECH's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case WITHTECH has ₩64.0b in net cash and a decent-looking balance sheet. So we are not troubled with WITHTECH's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with WITHTECH (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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. 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.