We Think WiSoLLTD (KOSDAQ:122990) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, WiSoL CO.,LTD. (KOSDAQ:122990) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for WiSoLLTD

How Much Debt Does WiSoLLTD Carry?

As you can see below, WiSoLLTD had ₩19.5b of debt at September 2020, down from ₩31.2b a year prior. However, it does have ₩105.9b in cash offsetting this, leading to net cash of ₩86.5b.

How Strong Is WiSoLLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WiSoLLTD had liabilities of ₩86.7b due within 12 months and liabilities of ₩3.19b due beyond that. On the other hand, it had cash of ₩105.9b and ₩53.8b worth of receivables due within a year. So it actually has ₩69.8b more liquid assets than total liabilities.

This surplus suggests that WiSoLLTD is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, WiSoLLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that WiSoLLTD's load is not too heavy, because its EBIT was down 59% over the last year. 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 ultimately the future profitability of the business will decide if WiSoLLTD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. WiSoLLTD 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. Over the last three years, WiSoLLTD reported free cash flow worth 4.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case WiSoLLTD has ₩86.5b in net cash and a decent-looking balance sheet. So we don't have any problem with WiSoLLTD's use of debt. 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. For instance, we've identified 3 warning signs for WiSoLLTD that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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