Is Komelon (KOSDAQ:049430) A Risky Investment?

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 Komelon Corporation (KOSDAQ:049430) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Komelon

What Is Komelon's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Komelon had ₩2.84b of debt, an increase on ₩2.72b, over one year. However, it does have ₩81.0b in cash offsetting this, leading to net cash of ₩78.1b.

A Look At Komelon's Liabilities

The latest balance sheet data shows that Komelon had liabilities of ₩8.81b due within a year, and liabilities of ₩4.95b falling due after that. Offsetting these obligations, it had cash of ₩81.0b as well as receivables valued at ₩11.9b due within 12 months. So it can boast ₩79.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Komelon's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Komelon boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Komelon has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Komelon'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 company can only pay off debt with cold hard cash, not accounting profits. Komelon may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Komelon recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that Komelon has net cash of ₩78.1b and plenty of liquid assets. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₩18b. At the end of the day we're not concerned about Komelon's debt. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Komelon 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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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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