Comunication WeaverLtd (KOSDAQ:056360) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Comunication Weaver Co.,Ltd. (KOSDAQ:056360) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Comunication WeaverLtd

What Is Comunication WeaverLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Comunication WeaverLtd had ₩14.0b of debt in December 2020, down from ₩17.5b, one year before. But on the other hand it also has ₩54.9b in cash, leading to a ₩40.9b net cash position.

How Healthy Is Comunication WeaverLtd's Balance Sheet?

According to the last reported balance sheet, Comunication WeaverLtd had liabilities of ₩26.8b due within 12 months, and liabilities of ₩2.74b due beyond 12 months. On the other hand, it had cash of ₩54.9b and ₩12.5b worth of receivables due within a year. So it can boast ₩37.9b more liquid assets than total liabilities.

This luscious liquidity implies that Comunication WeaverLtd's 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. Succinctly put, Comunication WeaverLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Comunication WeaverLtd's saving grace is its low debt levels, because its EBIT has tanked 71% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Comunication WeaverLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Comunication WeaverLtd 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. In the last two years, Comunication WeaverLtd's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Comunication WeaverLtd has net cash of ₩40.9b, as well as more liquid assets than liabilities. So we are not troubled with Comunication WeaverLtd's debt use. 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 - Comunication WeaverLtd has 3 warning signs 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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