Is OE Solutions (KOSDAQ:138080) Using Too Much Debt?

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 OE Solutions Co., Ltd. (KOSDAQ:138080) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 OE Solutions

What Is OE Solutions's Debt?

As you can see below, at the end of September 2020, OE Solutions had ₩36.2b of debt, up from ₩19.2b a year ago. Click the image for more detail. However, it does have ₩82.0b in cash offsetting this, leading to net cash of ₩45.8b.

How Healthy Is OE Solutions's Balance Sheet?

The latest balance sheet data shows that OE Solutions had liabilities of ₩46.9b due within a year, and liabilities of ₩2.33b falling due after that. On the other hand, it had cash of ₩82.0b and ₩19.7b worth of receivables due within a year. So it can boast ₩52.5b more liquid assets than total liabilities.

This short term liquidity is a sign that OE Solutions could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, OE Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that OE Solutions's load is not too heavy, because its EBIT was down 59% 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 it is future earnings, more than anything, that will determine OE Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While OE Solutions 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. During the last two years, OE Solutions produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case OE Solutions has ₩45.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩21b, being 68% of its EBIT. So we don't have any problem with OE Solutions'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. Take risks, for example - OE Solutions has 2 warning signs we think you should be aware of.

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.

When trading OE Solutions or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.