Does Moorim Paper (KRX:009200) Have a Healthy Balance Sheet?

David Iben put it well when he said: “Volatility is not a risk that we care about. Our aim is to avoid a permanent loss of capital.’ So it seems that smart money knows that debt — which usually plays a role in bankruptcies — is a very important factor when assessing a company’s risk. We note that Moorim Paper Co.,Ltd. (KRX:009200) has debt on its balance sheet. But the more important question is: How much risk does this debt carry?

Why is debt a risk?

Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. If things get really bad, lenders can take control of the deal. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive ones. The first step in looking at a company’s debt is to look at its cash and debt together.

Check out our latest analysis for Moorim Paper

What is Moorim Paper’s debt?

You can click on the graph below to see the historical figures, but it shows that Moorim Paper had 1.22t of debt in September 2020, an increase of 1.02t over one year. However, it also had ₩295.8 billion in cash, making its net debt ₩927.4 billion.

KOSE:A009200 Debt to Equity History March 17, 2021

A look at Moorim Paper’s liabilities

According to its most recently reported balance sheet, Moorim Paper had liabilities of ₩734.4 billion maturing within 12 months and liabilities of ₩801.7 billion maturing after 12 months. Against these obligations, it had cash of ₩295.8 billion and receivables of ₩155.1 billion that were due within 12 months. So it has liabilities totaling 1.09t more than its cash and short-term receivables combined.

That deficiency weighs heavily on the £119.4bn company itself, like a child struggling under the weight of a huge backpack full of books, its sports gear and a trumpet. So we would no doubt be watching his record closely. After all, Moorim Paper would likely need a major recapitalization if it had to pay its creditors today.

To estimate a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (its interest coverage). In this way, we take into account both the absolute amount of the debt and the interest paid on it.

Moorim Paper shareholders face the double whammy of a high net debt to EBITDA ratio (7.7) and rather weak interest coverage, with EBIT being just 1.3 times interest expense. The debt burden here is significant. Worse, Moorim Paper saw its trailing-12-month EBIT plummet 53%. If earnings continue like this over the long term, there’s a hell of a chance of paying off that debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt entirely in isolation; as Moorim Paper needs revenue to service this debt. So if you’re interested in learning more about earnings, it might be worth checking out this chart of his long-term earnings trend.

After all, a company can only pay off debts with hard cash, not with accounting profits. So we always check how much of that EBIT translates into free cash flow. Over the past three years, Moorim Paper has reported free cash flow of 66% of its EBIT, which is about normal since free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay off debt if necessary.

Our view

At first glance, Moorim Paper’s EBIT growth rate left us hesitant about the stock, and the level of total debt was no more enticing than that one empty restaurant on the busiest night of the year. But at least it’s pretty decent to convert EBIT to free cash flow; that is encouraging. After considering the data points discussed, we think Moorim Paper has too much debt. That kind of risk is okay for some, but it certainly doesn’t make us swim. Undoubtedly, we learn most about debt from the balance sheet. However, the entire investment risk is not on the balance sheet – far from it. These risks can be difficult to detect. Every company has them and we discovered them 2 warning signs for Moorim Paper (1 of which is potentially serious!) that you should know about.

After all this, if you’re more interested in a fast-growing company with a rock-solid balance sheet, then look no further our list of net cash growth stocks without delay.

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