Puloon Technology (KOSDAQ:094940) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Puloon Technology Inc. (KOSDAQ:094940) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Puloon Technology

What Is Puloon Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Puloon Technology had ₩3.68b in debt in December 2020; about the same as the year before. But on the other hand it also has ₩14.4b in cash, leading to a ₩10.7b net cash position.

A Look At Puloon Technology's Liabilities

According to the last reported balance sheet, Puloon Technology had liabilities of ₩8.08b due within 12 months, and liabilities of ₩712.0m due beyond 12 months. On the other hand, it had cash of ₩14.4b and ₩3.16b worth of receivables due within a year. So it actually has ₩8.74b more liquid assets than total liabilities.

This surplus suggests that Puloon Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Puloon Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Puloon Technology's saving grace is its low debt levels, because its EBIT has tanked 73% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Puloon Technology's earnings that will influence how the balance sheet holds up in the future. 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. Puloon Technology 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. In the last three years, Puloon Technology's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Puloon Technology has net cash of ₩10.7b, as well as more liquid assets than liabilities. So we are not troubled with Puloon Technology's debt use. 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. We've identified 2 warning signs with Puloon Technology , and understanding them should be part of your investment process.

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. 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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