Health Check: How Prudently Does Kyung Chang Industrial (KOSDAQ:024910) Use 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.' 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. We can see that Kyung Chang Industrial Co., Ltd. (KOSDAQ:024910) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kyung Chang Industrial

What Is Kyung Chang Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Kyung Chang Industrial had debt of ₩320.0b at the end of September 2020, a reduction from ₩350.6b over a year. However, it does have ₩31.6b in cash offsetting this, leading to net debt of about ₩288.4b.

How Healthy Is Kyung Chang Industrial's Balance Sheet?

We can see from the most recent balance sheet that Kyung Chang Industrial had liabilities of ₩302.1b falling due within a year, and liabilities of ₩147.8b due beyond that. On the other hand, it had cash of ₩31.6b and ₩77.6b worth of receivables due within a year. So it has liabilities totalling ₩340.7b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩108.5b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Kyung Chang Industrial would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Kyung Chang Industrial's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Kyung Chang Industrial had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₩481b. We would much prefer see growth.

Caveat Emptor

Not only did Kyung Chang Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩3.9b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost ₩58b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 warning signs for Kyung Chang Industrial (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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