Health Check: How Prudently Does Kumho HT (KRX:214330) 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 note that Kumho HT, Inc (KRX:214330) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kumho HT

What Is Kumho HT's Net Debt?

As you can see below, Kumho HT had ₩77.1b of debt at December 2020, down from ₩105.6b a year prior. However, it does have ₩83.9b in cash offsetting this, leading to net cash of ₩6.75b.

How Strong Is Kumho HT's Balance Sheet?

The latest balance sheet data shows that Kumho HT had liabilities of ₩120.1b due within a year, and liabilities of ₩1.11b falling due after that. On the other hand, it had cash of ₩83.9b and ₩54.8b worth of receivables due within a year. So it can boast ₩17.5b more liquid assets than total liabilities.

This surplus suggests that Kumho HT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kumho HT boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kumho HT'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.

Over 12 months, Kumho HT made a loss at the EBIT level, and saw its revenue drop to ₩220b, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Kumho HT?

Although Kumho HT had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩13b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Kumho HT (2 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

When trading Kumho HT or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.