These 4 Measures Indicate That Korea Cast Iron Pipe Ind (KRX:000970) Is Using Debt Safely

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. Importantly, Korea Cast Iron Pipe Ind. Co., Ltd. (KRX:000970) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Korea Cast Iron Pipe Ind

What Is Korea Cast Iron Pipe Ind's Net 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.

A Look At Korea Cast Iron Pipe Ind's Liabilities

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 these obligations, it had cash of ₩26.4b as well as receivables valued at ₩41.8b 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. Succinctly put, Korea Cast Iron Pipe Ind boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Korea Cast Iron Pipe Ind has increased its EBIT by 2.4% 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 Korea Cast Iron Pipe Ind 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. 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 cold hard cash means it can reduce its debt when it wants to.

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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Korea Cast Iron Pipe Ind .

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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