These 4 Measures Indicate That ELUON (KOSDAQ:065440) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that ELUON Corporation (KOSDAQ:065440) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ELUON

What Is ELUON's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 ELUON had ₩12.6b of debt, an increase on ₩12.1b, over one year. But it also has ₩34.9b in cash to offset that, meaning it has ₩22.3b net cash.

How Strong Is ELUON's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ELUON had liabilities of ₩21.3b due within 12 months and liabilities of ₩3.10b due beyond that. On the other hand, it had cash of ₩34.9b and ₩11.4b worth of receivables due within a year. So it can boast ₩21.9b more liquid assets than total liabilities.

This luscious liquidity implies that ELUON's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, ELUON boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, ELUON grew its EBIT by 194% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is ELUON'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While ELUON 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. Happily for any shareholders, ELUON actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ELUON has net cash of ₩22.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 198% of that EBIT to free cash flow, bringing in ₩6.4b. The bottom line is that ELUON's use of debt is absolutely fine. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for ELUON you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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