We Think Taewoong LogisticsLtd (KOSDAQ:124560) Can Stay On Top Of Its 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.' 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. As with many other companies Taewoong Logistics Co.,Ltd. (KOSDAQ:124560) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taewoong LogisticsLtd

What Is Taewoong LogisticsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Taewoong LogisticsLtd had ₩10.7b of debt, an increase on ₩8.82b, over one year. But on the other hand it also has ₩14.0b in cash, leading to a ₩3.24b net cash position.

How Healthy Is Taewoong LogisticsLtd's Balance Sheet?

According to the last reported balance sheet, Taewoong LogisticsLtd had liabilities of ₩59.3b due within 12 months, and liabilities of ₩4.17b due beyond 12 months. Offsetting these obligations, it had cash of ₩14.0b as well as receivables valued at ₩49.4b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Taewoong LogisticsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩133.2b company is struggling for cash, we still think it's worth monitoring its 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's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last two years, Taewoong LogisticsLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

We could understand if investors are concerned about Taewoong LogisticsLtd's liabilities, but we can be reassured by the fact it has has net cash of ₩3.24b. So we don't have any problem with Taewoong LogisticsLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Taewoong LogisticsLtd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Taewoong LogisticsLtd, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade 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 (at) simplywallst.com.