Is Kia (KRX:000270) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Kia Corporation (KRX:000270) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kia

How Much Debt Does Kia Carry?

You can click the graphic below for the historical numbers, but it shows that Kia had ₩2.93t of debt in September 2024, down from ₩4.37t, one year before. But on the other hand it also has ₩22t in cash, leading to a ₩19t net cash position.

How Strong Is Kia's Balance Sheet?

We can see from the most recent balance sheet that Kia had liabilities of ₩27t falling due within a year, and liabilities of ₩8.36t due beyond that. On the other hand, it had cash of ₩22t and ₩6.36t worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩7.27t.

Of course, Kia has a titanic market capitalization of ₩39t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kia boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Kia grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kia 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 most recent three years, Kia recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Kia does have more liabilities than liquid assets, it also has net cash of ₩19t. And it impressed us with free cash flow of ₩6.1t, being 77% of its EBIT. So we don't think Kia's use of debt is risky. Given Kia has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.