Does ktcs (KRX:058850) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies ktcs corporation (KRX:058850) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ktcs

What Is ktcs's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ktcs had debt of ₩6.56b, up from ₩85.8m in one year. But on the other hand it also has ₩96.4b in cash, leading to a ₩89.9b net cash position.

How Strong Is ktcs' Balance Sheet?

The latest balance sheet data shows that ktcs had liabilities of ₩140.3b due within a year, and liabilities of ₩48.7b falling due after that. On the other hand, it had cash of ₩96.4b and ₩105.8b worth of receivables due within a year. So it can boast ₩13.2b more liquid assets than total liabilities.

This surplus suggests that ktcs has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ktcs boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that ktcs has increased its EBIT by 8.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ktcs'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ktcs 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. Happily for any shareholders, ktcs actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ktcs has net cash of ₩89.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩27b, being 109% of its EBIT. So is ktcs's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for ktcs (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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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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