Is Kencoa Aerospace (KOSDAQ:274090) Weighed On By Its Debt Load?

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.' 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. We note that Kencoa Aerospace Corporation (KOSDAQ:274090) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kencoa Aerospace

What Is Kencoa Aerospace's Debt?

You can click the graphic below for the historical numbers, but it shows that Kencoa Aerospace had ₩42.3b of debt in September 2024, down from ₩53.9b, one year before. However, its balance sheet shows it holds ₩92.0b in cash, so it actually has ₩49.8b net cash.

A Look At Kencoa Aerospace's Liabilities

According to the last reported balance sheet, Kencoa Aerospace had liabilities of ₩55.0b due within 12 months, and liabilities of ₩22.5b due beyond 12 months. Offsetting this, it had ₩92.0b in cash and ₩21.3b in receivables that were due within 12 months. So it actually has ₩35.8b more liquid assets than total liabilities.

It's good to see that Kencoa Aerospace has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Kencoa Aerospace 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 future earnings, more than anything, that will determine Kencoa Aerospace's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Kencoa Aerospace 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 Kencoa Aerospace?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Kencoa Aerospace had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩30b and booked a ₩5.0b accounting loss. But the saving grace is the ₩49.8b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 2 warning signs for Kencoa Aerospace that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.