These 4 Measures Indicate That ILJIN Materials (KRX:020150) Is Using Debt Extensively

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.' 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 ILJIN Materials Co., Ltd. (KRX:020150) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ILJIN Materials

What Is ILJIN Materials's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ILJIN Materials had debt of ₩49.5b, up from ₩8.18b in one year. But on the other hand it also has ₩312.5b in cash, leading to a ₩263.1b net cash position.

A Look At ILJIN Materials's Liabilities

According to the last reported balance sheet, ILJIN Materials had liabilities of ₩100.7b due within 12 months, and liabilities of ₩112.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩312.5b as well as receivables valued at ₩101.7b due within 12 months. So it can boast ₩201.0b more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for ILJIN Materials if management cannot prevent a repeat of the 27% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ILJIN Materials 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. ILJIN Materials 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, ILJIN Materials saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case ILJIN Materials has ₩263.1b in net cash and a decent-looking balance sheet. So while ILJIN Materials does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 1 warning sign for ILJIN Materials that you should be aware of.

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. 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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