Is iMarketKorea (KRX:122900) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that iMarketKorea Inc. (KRX:122900) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for iMarketKorea

How Much Debt Does iMarketKorea Carry?

The image below, which you can click on for greater detail, shows that iMarketKorea had debt of ₩14.4b at the end of September 2020, a reduction from ₩17.2b over a year. However, it does have ₩277.0b in cash offsetting this, leading to net cash of ₩262.6b.

How Healthy Is iMarketKorea's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that iMarketKorea had liabilities of ₩629.1b due within 12 months and liabilities of ₩62.7b due beyond that. On the other hand, it had cash of ₩277.0b and ₩499.8b worth of receivables due within a year. So it actually has ₩85.1b more liquid assets than total liabilities.

This luscious liquidity implies that iMarketKorea's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, iMarketKorea boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, iMarketKorea's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is iMarketKorea'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. iMarketKorea 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. Over the most recent three years, iMarketKorea recorded free cash flow worth 79% 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, you should keep in mind that iMarketKorea has net cash of ₩262.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩71b, being 79% of its EBIT. So we don't think iMarketKorea'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. For example iMarketKorea has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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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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