Does Powernet Technologies (KOSDAQ:037030) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Powernet Technologies Corporation (KOSDAQ:037030) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Powernet Technologies

How Much Debt Does Powernet Technologies Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Powernet Technologies had debt of ₩30.5b, up from ₩19.5b in one year. But on the other hand it also has ₩66.4b in cash, leading to a ₩36.0b net cash position.

How Strong Is Powernet Technologies' Balance Sheet?

We can see from the most recent balance sheet that Powernet Technologies had liabilities of ₩90.8b falling due within a year, and liabilities of ₩11.4b due beyond that. Offsetting this, it had ₩66.4b in cash and ₩72.5b in receivables that were due within 12 months. So it can boast ₩36.7b more liquid assets than total liabilities.

This luscious liquidity implies that Powernet Technologies' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Powernet Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Powernet Technologies has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Powernet Technologies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Powernet Technologies 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. Happily for any shareholders, Powernet Technologies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Powernet Technologies has net cash of ₩36.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in ₩20b. The bottom line is that Powernet Technologies's use of debt is absolutely fine. 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. Case in point: We've spotted 1 warning sign for Powernet Technologies 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.