Is Iljin Diamond (KRX:081000) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Iljin Diamond Co. Ltd. (KRX:081000) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Iljin Diamond

What Is Iljin Diamond's Debt?

As you can see below, at the end of December 2020, Iljin Diamond had ₩7.74b of debt, up from ₩4.91b a year ago. Click the image for more detail. But on the other hand it also has ₩90.3b in cash, leading to a ₩82.6b net cash position.

How Healthy Is Iljin Diamond's Balance Sheet?

According to the last reported balance sheet, Iljin Diamond had liabilities of ₩36.9b due within 12 months, and liabilities of ₩22.2b due beyond 12 months. Offsetting these obligations, it had cash of ₩90.3b as well as receivables valued at ₩19.0b due within 12 months. So it can boast ₩50.2b more liquid assets than total liabilities.

This surplus suggests that Iljin Diamond has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Iljin Diamond has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Iljin Diamond if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Iljin Diamond'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Iljin Diamond 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, Iljin Diamond produced sturdy free cash flow equating to 76% 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 it is always sensible to investigate a company's debt, in this case Iljin Diamond has ₩82.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in -₩14b. So we are not troubled with Iljin Diamond's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Iljin Diamond (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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