These 4 Measures Indicate That Kyung Dong Navien (KRX:009450) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Kyung Dong Navien Co., Ltd. (KRX:009450) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Kyung Dong Navien

What Is Kyung Dong Navien's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kyung Dong Navien had ₩101.3b of debt in December 2023, down from ₩201.7b, one year before. However, its balance sheet shows it holds ₩101.6b in cash, so it actually has ₩345.2m net cash.

How Healthy Is Kyung Dong Navien's Balance Sheet?

According to the last reported balance sheet, Kyung Dong Navien had liabilities of ₩410.0b due within 12 months, and liabilities of ₩66.0b due beyond 12 months. Offsetting this, it had ₩101.6b in cash and ₩127.8b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩246.6b.

While this might seem like a lot, it is not so bad since Kyung Dong Navien has a market capitalization of ₩857.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Kyung Dong Navien also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Kyung Dong Navien has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Kyung Dong Navien's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kyung Dong Navien 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. In the last three years, Kyung Dong Navien's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Kyung Dong Navien's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩345.2m. And we liked the look of last year's 77% year-on-year EBIT growth. So is Kyung Dong Navien's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Kyung Dong Navien, you may well want to click here to check an interactive graph of its earnings per share history.

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.