Taewoong LogisticsLtd (KOSDAQ:124560) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Taewoong Logistics Co.,Ltd. (KOSDAQ:124560) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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, 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.

View our latest analysis for Taewoong LogisticsLtd

What Is Taewoong LogisticsLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Taewoong LogisticsLtd had debt of ₩15.4b, up from ₩14.5b in one year. But it also has ₩23.5b in cash to offset that, meaning it has ₩8.06b net cash.

How Strong Is Taewoong LogisticsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Taewoong LogisticsLtd had liabilities of ₩60.8b due within 12 months and liabilities of ₩3.98b due beyond that. Offsetting these obligations, it had cash of ₩23.5b as well as receivables valued at ₩41.1b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Taewoong LogisticsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩90.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Taewoong LogisticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Taewoong LogisticsLtd saw its EBIT drop by 6.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Taewoong LogisticsLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Taewoong LogisticsLtd 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 two years, Taewoong LogisticsLtd's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Taewoong LogisticsLtd has ₩8.06b in net cash. So we don't have any problem with Taewoong LogisticsLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 4 warning signs for Taewoong LogisticsLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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