These 4 Measures Indicate That CS Holdings (KRX:000590) Is Using Debt Safely

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.' 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 can see that CS Holdings Co., Ltd. (KRX:000590) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CS Holdings

What Is CS Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 CS Holdings had ₩2.08b of debt, an increase on ₩1.44b, over one year. But it also has ₩137.8b in cash to offset that, meaning it has ₩135.7b net cash.

How Healthy Is CS Holdings's Balance Sheet?

The latest balance sheet data shows that CS Holdings had liabilities of ₩18.5b due within a year, and liabilities of ₩10.6b falling due after that. Offsetting this, it had ₩137.8b in cash and ₩20.1b in receivables that were due within 12 months. So it can boast ₩128.8b more liquid assets than total liabilities.

This surplus liquidity suggests that CS Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, CS Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that CS Holdings has increased its EBIT by 5.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CS Holdings will need earnings to service that debt. 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. While CS Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, CS Holdings recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that CS Holdings has net cash of ₩135.7b and plenty of liquid assets. So we don't think CS Holdings's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for CS Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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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