WINS (KOSDAQ:136540) Has A Rock Solid Balance Sheet

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. Importantly, WINS Co., Ltd (KOSDAQ:136540) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 WINS

What Is WINS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that WINS had ₩31.0b of debt in December 2020, down from ₩37.5b, one year before. However, it does have ₩73.4b in cash offsetting this, leading to net cash of ₩42.4b.

A Look At WINS' Liabilities

Zooming in on the latest balance sheet data, we can see that WINS had liabilities of ₩43.5b due within 12 months and liabilities of ₩2.96b due beyond that. Offsetting this, it had ₩73.4b in cash and ₩14.5b in receivables that were due within 12 months. So it actually has ₩41.4b more liquid assets than total liabilities.

This excess liquidity suggests that WINS is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, WINS boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, WINS grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if WINS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WINS 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. During the last three years, WINS produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case WINS has ₩42.4b in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So is WINS's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - WINS has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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