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.' 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 can see that Innowireless Co., Ltd. (KOSDAQ:073490) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Innowireless
What Is Innowireless's Net Debt?
As you can see below, at the end of June 2024, Innowireless had ₩27.7b of debt, up from none a year ago. Click the image for more detail. However, it does have ₩72.4b in cash offsetting this, leading to net cash of ₩44.7b.
A Look At Innowireless' Liabilities
We can see from the most recent balance sheet that Innowireless had liabilities of ₩63.6b falling due within a year, and liabilities of ₩4.71b due beyond that. On the other hand, it had cash of ₩72.4b and ₩27.7b worth of receivables due within a year. So it actually has ₩31.7b more liquid assets than total liabilities.
This surplus suggests that Innowireless is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Innowireless boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Innowireless's load is not too heavy, because its EBIT was down 92% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Innowireless 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Innowireless 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. Over the most recent three years, Innowireless recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Innowireless has ₩44.7b in net cash and a decent-looking balance sheet. So we are not troubled with Innowireless'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. Be aware that Innowireless is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About KOSDAQ:A073490
Innowireless
Develops, manufactures, and sells mobile communication measurement systems and measuring equipment in South Korea.
Flawless balance sheet slight.