These 4 Measures Indicate That Koryo Credit Information (KOSDAQ:049720) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Koryo Credit Information Co., Ltd. (KOSDAQ:049720) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Koryo Credit Information

What Is Koryo Credit Information's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Koryo Credit Information had debt of ₩8.92b, up from ₩3.00b in one year. However, it does have ₩9.16b in cash offsetting this, leading to net cash of ₩238.5m.

How Healthy Is Koryo Credit Information's Balance Sheet?

We can see from the most recent balance sheet that Koryo Credit Information had liabilities of ₩29.6b falling due within a year, and liabilities of ₩11.6b due beyond that. Offsetting this, it had ₩9.16b in cash and ₩7.24b in receivables that were due within 12 months. So its liabilities total ₩24.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Koryo Credit Information has a market capitalization of ₩86.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Koryo Credit Information boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Koryo Credit Information has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Koryo Credit Information'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. While Koryo Credit Information has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Koryo Credit Information's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Koryo Credit Information does have more liabilities than liquid assets, it also has net cash of ₩238.5m. And it impressed us with its EBIT growth of 29% over the last year. So we don't think Koryo Credit Information's use of debt is risky. 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. For instance, we've identified 2 warning signs for Koryo Credit Information (1 is concerning) you should be aware of.

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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