Does Iljin Display (KRX:020760) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Iljin Display Co., Ltd. (KRX:020760) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Iljin Display

How Much Debt Does Iljin Display Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Iljin Display had ₩62.0b of debt, an increase on ₩46.0b, over one year. However, it also had ₩1.64b in cash, and so its net debt is ₩60.4b.

How Healthy Is Iljin Display's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iljin Display had liabilities of ₩74.5b due within 12 months and liabilities of ₩8.33b due beyond that. Offsetting this, it had ₩1.64b in cash and ₩15.6b in receivables that were due within 12 months. So it has liabilities totalling ₩65.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Iljin Display has a market capitalization of ₩167.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Iljin Display's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Iljin Display had a loss before interest and tax, and actually shrunk its revenue by 43%, to ₩74b. To be frank that doesn't bode well.

Caveat Emptor

While Iljin Display's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩30b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩31b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Iljin Display (1 is a bit concerning) you should be aware of.

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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