Is Ezwel (KOSDAQ:090850) Using Too Much Debt?

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.' 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. We note that Ezwel Co., Ltd. (KOSDAQ:090850) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ezwel

What Is Ezwel's Net Debt?

As you can see below, at the end of September 2020, Ezwel had ₩6.30b of debt, up from ₩3.90b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩39.0b in cash, so it actually has ₩32.7b net cash.

How Healthy Is Ezwel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ezwel had liabilities of ₩62.8b due within 12 months and liabilities of ₩9.98b due beyond that. Offsetting these obligations, it had cash of ₩39.0b as well as receivables valued at ₩46.7b due within 12 months. So it actually has ₩12.9b more liquid assets than total liabilities.

This short term liquidity is a sign that Ezwel could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ezwel has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Ezwel grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ezwel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ezwel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Ezwel recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Ezwel has ₩32.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 41% over the last year. So we don't think Ezwel's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Ezwel you should be aware of, and 1 of them can't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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