Does Wave Electronics (KOSDAQ:095270) Have A Healthy Balance Sheet?

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. As with many other companies Wave Electronics Co., Ltd. (KOSDAQ:095270) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wave Electronics

What Is Wave Electronics's Debt?

The image below, which you can click on for greater detail, shows that Wave Electronics had debt of ₩40.6b at the end of September 2020, a reduction from ₩54.3b over a year. On the flip side, it has ₩26.0b in cash leading to net debt of about ₩14.6b.

How Strong Is Wave Electronics' Balance Sheet?

According to the last reported balance sheet, Wave Electronics had liabilities of ₩49.3b due within 12 months, and liabilities of ₩11.1b due beyond 12 months. Offsetting this, it had ₩26.0b in cash and ₩7.37b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩27.0b.

While this might seem like a lot, it is not so bad since Wave Electronics has a market capitalization of ₩71.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wave Electronics 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.

Over 12 months, Wave Electronics reported revenue of ₩43b, which is a gain of 2.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Wave Electronics had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩15b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩252m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Wave Electronics (including 1 which is a bit unpleasant) .

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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