Is POONGWON PRECISIONLtd (KOSDAQ:371950) Using Too Much Debt?

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.' 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. Importantly, POONGWON PRECISION CO.,Ltd. (KOSDAQ:371950) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for POONGWON PRECISIONLtd

How Much Debt Does POONGWON PRECISIONLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2023 POONGWON PRECISIONLtd had debt of ₩33.0b, up from ₩10.1b in one year. On the flip side, it has ₩675.1m in cash leading to net debt of about ₩32.3b.

How Healthy Is POONGWON PRECISIONLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that POONGWON PRECISIONLtd had liabilities of ₩30.9b due within 12 months and liabilities of ₩14.2b due beyond that. On the other hand, it had cash of ₩675.1m and ₩8.37b worth of receivables due within a year. So its liabilities total ₩36.1b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because POONGWON PRECISIONLtd is worth ₩170.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since POONGWON PRECISIONLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year POONGWON PRECISIONLtd had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to ₩43b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months POONGWON PRECISIONLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩22b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩30b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 POONGWON PRECISIONLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.