We Think KG Mobility (KRX:003620) Is Taking Some Risk With Its Debt

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. We note that KG Mobility Corp. (KRX:003620) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for KG Mobility

What Is KG Mobility's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 KG Mobility had ₩189.8b of debt, an increase on ₩84.9b, over one year. But it also has ₩207.9b in cash to offset that, meaning it has ₩18.1b net cash.

How Strong Is KG Mobility's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KG Mobility had liabilities of ₩1.07t due within 12 months and liabilities of ₩559.3b due beyond that. On the other hand, it had cash of ₩207.9b and ₩329.0b worth of receivables due within a year. So it has liabilities totalling ₩1.09t more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩1.06t market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that KG Mobility has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Although KG Mobility made a loss at the EBIT level, last year, it was also good to see that it generated ₩18b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is KG Mobility's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While KG Mobility 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. During the last year, KG Mobility burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While KG Mobility does have more liabilities than liquid assets, it also has net cash of ₩18.1b. Despite its cash we think that KG Mobility seems to struggle to convert EBIT to free cash flow, so we are wary of the stock. 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. Case in point: We've spotted 1 warning sign for KG Mobility you should be aware of.

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.

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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.