Is Comunication WeaverLtd (KOSDAQ:056360) 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.' 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. Importantly, Comunication Weaver Co.,Ltd. (KOSDAQ:056360) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Comunication WeaverLtd

How Much Debt Does Comunication WeaverLtd Carry?

As you can see below, Comunication WeaverLtd had ₩14.1b of debt at September 2020, down from ₩15.6b a year prior. But it also has ₩50.1b in cash to offset that, meaning it has ₩35.9b net cash.

How Healthy Is Comunication WeaverLtd's Balance Sheet?

The latest balance sheet data shows that Comunication WeaverLtd had liabilities of ₩26.0b due within a year, and liabilities of ₩3.60b falling due after that. Offsetting this, it had ₩50.1b in cash and ₩3.81b in receivables that were due within 12 months. So it can boast ₩24.3b more liquid assets than total liabilities.

This surplus suggests that Comunication WeaverLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Comunication WeaverLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Comunication WeaverLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 created free cash flow amounting to 3.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Comunication WeaverLtd has net cash of ₩35.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think Comunication WeaverLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Comunication WeaverLtd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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