Is Taewoong Logistics (KOSDAQ:124560) A Risky Investment?

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, Taewoong Logistics Co., Ltd. (KOSDAQ:124560) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taewoong Logistics

How Much Debt Does Taewoong Logistics Carry?

As you can see below, Taewoong Logistics had ₩66.3b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩78.3b in cash, leading to a ₩12.1b net cash position.

A Look At Taewoong Logistics' Liabilities

We can see from the most recent balance sheet that Taewoong Logistics had liabilities of ₩173.0b falling due within a year, and liabilities of ₩30.9b due beyond that. Offsetting these obligations, it had cash of ₩78.3b as well as receivables valued at ₩112.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩12.7b.

Given Taewoong Logistics has a market capitalization of ₩139.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Taewoong Logistics also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Taewoong Logistics if management cannot prevent a repeat of the 65% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Taewoong Logistics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Taewoong Logistics 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. In the last three years, Taewoong Logistics created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Taewoong Logistics has ₩12.1b in net cash. So while Taewoong Logistics does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Taewoong Logistics (of which 1 makes us a bit uncomfortable!) you should know about.

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.