Is Korea Parts & FastenersLtd (KOSDAQ:024880) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Korea Parts & Fasteners Co.,Ltd (KOSDAQ:024880) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Korea Parts & FastenersLtd

What Is Korea Parts & FastenersLtd's Debt?

As you can see below, Korea Parts & FastenersLtd had ₩207.2b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩77.1b in cash offsetting this, leading to net debt of about ₩130.1b.

A Look At Korea Parts & FastenersLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Korea Parts & FastenersLtd had liabilities of ₩193.6b due within 12 months and liabilities of ₩46.0b due beyond that. On the other hand, it had cash of ₩77.1b and ₩64.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩98.1b.

Given this deficit is actually higher than the company's market capitalization of ₩77.9b, we think shareholders really should watch Korea Parts & FastenersLtd's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Korea Parts & FastenersLtd will need earnings to service that debt. 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 Korea Parts & FastenersLtd had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩342b. That's not what we would hope to see.

Caveat Emptor

Not only did Korea Parts & FastenersLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩4.2b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩2.9b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Korea Parts & FastenersLtd is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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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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.
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