Is OpenknowlLtd (KOSDAQ:440320) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Openknowl Co.,Ltd. (KOSDAQ:440320) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for OpenknowlLtd

How Much Debt Does OpenknowlLtd Carry?

You can click the graphic below for the historical numbers, but it shows that OpenknowlLtd had ₩4.44b of debt in March 2024, down from ₩7.11b, one year before. However, it does have ₩19.2b in cash offsetting this, leading to net cash of ₩14.8b.

How Strong Is OpenknowlLtd's Balance Sheet?

According to the last reported balance sheet, OpenknowlLtd had liabilities of ₩7.86b due within 12 months, and liabilities of ₩3.11b due beyond 12 months. Offsetting these obligations, it had cash of ₩19.2b as well as receivables valued at ₩5.31b due within 12 months. So it can boast ₩13.6b more liquid assets than total liabilities.

This excess liquidity suggests that OpenknowlLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, OpenknowlLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, OpenknowlLtd grew its EBIT by 206% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since OpenknowlLtd will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While OpenknowlLtd 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. Over the last two years, OpenknowlLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that OpenknowlLtd has net cash of ₩14.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 206% year-on-year EBIT growth. So is OpenknowlLtd's debt a risk? It doesn't seem so to us. 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 OpenknowlLtd has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com