These 4 Measures Indicate That Paseco (KOSDAQ:037070) Is Using Debt Safely

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.' 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. We can see that Paseco Co. Ltd (KOSDAQ:037070) does use debt in its business. But is this debt a concern to shareholders?

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. 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.

Check out our latest analysis for Paseco

What Is Paseco's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Paseco had ₩17.2b of debt, an increase on ₩10.2b, over one year. However, it does have ₩31.2b in cash offsetting this, leading to net cash of ₩14.0b.

How Strong Is Paseco's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Paseco had liabilities of ₩49.1b due within 12 months and liabilities of ₩4.21b due beyond that. On the other hand, it had cash of ₩31.2b and ₩15.0b worth of receivables due within a year. So its liabilities total ₩7.09b more than the combination of its cash and short-term receivables.

Of course, Paseco has a market capitalization of ₩181.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Paseco 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 Paseco has boosted its EBIT by 44%, 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 Paseco'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 company can only pay off debt with cold hard cash, not accounting profits. While Paseco 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. During the last three years, Paseco generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Paseco's liabilities, but we can be reassured by the fact it has has net cash of ₩14.0b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in ₩18b. So we don't think Paseco's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Paseco, 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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