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

Simply Wall St · 10/16 22:54

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, POONGWON PRECISION CO.,Ltd. (KOSDAQ:371950) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for POONGWON PRECISIONLtd

What Is POONGWON PRECISIONLtd's Debt?

As you can see below, at the end of June 2024, POONGWON PRECISIONLtd had ₩44.7b of debt, up from ₩20.8b a year ago. Click the image for more detail. On the flip side, it has ₩16.3b in cash leading to net debt of about ₩28.4b.

debt-equity-history-analysis
KOSDAQ:A371950 Debt to Equity History October 16th 2024

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 ₩81.0b due within 12 months and liabilities of ₩16.6b due beyond that. Offsetting this, it had ₩16.3b in cash and ₩16.6b in receivables that were due within 12 months. So its liabilities total ₩64.7b more than the combination of its cash and short-term receivables.

POONGWON PRECISIONLtd has a market capitalization of ₩237.1b, so it could very likely raise cash to ameliorate 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to ₩51b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, POONGWON PRECISIONLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩23b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩25b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 3 warning signs with POONGWON PRECISIONLtd (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.