Here's Why Zungwon En-Sys (KOSDAQ:045510) Can Afford Some 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. Importantly, Zungwon En-Sys Inc. (KOSDAQ:045510) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zungwon En-Sys

What Is Zungwon En-Sys's Net Debt?

The image below, which you can click on for greater detail, shows that Zungwon En-Sys had debt of ₩12.7b at the end of September 2020, a reduction from ₩14.2b over a year. However, because it has a cash reserve of ₩3.30b, its net debt is less, at about ₩9.41b.

How Healthy Is Zungwon En-Sys' Balance Sheet?

We can see from the most recent balance sheet that Zungwon En-Sys had liabilities of ₩36.2b falling due within a year, and liabilities of ₩3.80b due beyond that. On the other hand, it had cash of ₩3.30b and ₩28.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩7.88b.

Given Zungwon En-Sys has a market capitalization of ₩57.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zungwon En-Sys's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zungwon En-Sys wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ₩181b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Zungwon En-Sys produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩33m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩279m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Zungwon En-Sys has 2 warning signs (and 1 which is significant) we think you should know about.

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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