Is KNR System (KOSDAQ:199430) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that KNR System Inc. (KOSDAQ:199430) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KNR System

What Is KNR System's Net Debt?

The image below, which you can click on for greater detail, shows that KNR System had debt of ₩11.8b at the end of September 2024, a reduction from ₩16.1b over a year. But on the other hand it also has ₩15.0b in cash, leading to a ₩3.14b net cash position.

How Strong Is KNR System's Balance Sheet?

According to the last reported balance sheet, KNR System had liabilities of ₩13.8b due within 12 months, and liabilities of ₩5.68b due beyond 12 months. On the other hand, it had cash of ₩15.0b and ₩4.67b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to KNR System's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩126.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, KNR System boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is KNR System'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.

Over 12 months, KNR System saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is KNR System?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that KNR System had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩11b and booked a ₩4.1b accounting loss. But at least it has ₩3.14b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for KNR System (3 are a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.