Is Korea Cast Iron Pipe Ind (KRX:000970) A Risky Investment?

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 Korea Cast Iron Pipe Ind. Co., Ltd. (KRX:000970) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Korea Cast Iron Pipe Ind

What Is Korea Cast Iron Pipe Ind's Debt?

As you can see below, Korea Cast Iron Pipe Ind had ₩1.79b of debt at September 2020, down from ₩21.0b a year prior. However, its balance sheet shows it holds ₩26.4b in cash, so it actually has ₩24.6b net cash.

How Healthy Is Korea Cast Iron Pipe Ind's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Korea Cast Iron Pipe Ind had liabilities of ₩55.1b due within 12 months and liabilities of ₩7.10b due beyond that. Offsetting this, it had ₩26.4b in cash and ₩41.8b in receivables that were due within 12 months. So it actually has ₩5.96b more liquid assets than total liabilities.

This short term liquidity is a sign that Korea Cast Iron Pipe Ind could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Korea Cast Iron Pipe Ind has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Korea Cast Iron Pipe Ind grew its EBIT by 2.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Korea Cast Iron Pipe Ind'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. Korea Cast Iron Pipe Ind 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. During the last three years, Korea Cast Iron Pipe Ind produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. 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, you should keep in mind that Korea Cast Iron Pipe Ind has net cash of ₩24.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩19b, being 72% of its EBIT. So we don't think Korea Cast Iron Pipe Ind's use of debt is risky. 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. For example, we've discovered 1 warning sign for Korea Cast Iron Pipe Ind 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.

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