Kyungbangco.Ltd (KRX:000050) Has A Pretty 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 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. As with many other companies Kyungbangco.Ltd (KRX:000050) makes use of debt. But is this debt a concern to shareholders?

Our free stock report includes 1 warning sign investors should be aware of before investing in Kyungbangco.Ltd. Read for free now.

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Kyungbangco.Ltd Carry?

As you can see below, Kyungbangco.Ltd had ₩217.7b of debt at December 2024, down from ₩227.6b a year prior. However, it also had ₩21.6b in cash, and so its net debt is ₩196.1b.

How Strong Is Kyungbangco.Ltd's Balance Sheet?

According to the last reported balance sheet, Kyungbangco.Ltd had liabilities of ₩247.4b due within 12 months, and liabilities of ₩207.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩21.6b as well as receivables valued at ₩61.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩371.9b.

This deficit casts a shadow over the ₩216.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kyungbangco.Ltd would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Kyungbangco.Ltd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Kyungbangco.Ltd's net debt is 2.8 times its EBITDA, which is a significant but still reasonable amount of leverage. However, its interest coverage of 1k is very high, suggesting that the interest expense on the debt is currently quite low. Pleasingly, Kyungbangco.Ltd is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 109% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Kyungbangco.Ltd'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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Kyungbangco.Ltd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Kyungbangco.Ltd's level of total liabilities was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. Looking at all this data makes us feel a little cautious about Kyungbangco.Ltd's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. We've identified 1 warning sign with Kyungbangco.Ltd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.