Kyungdong Invest (KRX:012320) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kyungdong Invest Co., Ltd (KRX:012320) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kyungdong Invest

What Is Kyungdong Invest's Debt?

The chart below, which you can click on for greater detail, shows that Kyungdong Invest had ₩36.2b in debt in June 2024; about the same as the year before. But it also has ₩95.5b in cash to offset that, meaning it has ₩59.4b net cash.

How Healthy Is Kyungdong Invest's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kyungdong Invest had liabilities of ₩64.6b due within 12 months and liabilities of ₩72.3b due beyond that. Offsetting this, it had ₩95.5b in cash and ₩49.3b in receivables that were due within 12 months. So it actually has ₩8.01b more liquid assets than total liabilities.

This short term liquidity is a sign that Kyungdong Invest could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kyungdong Invest boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Kyungdong Invest has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is Kyungdong Invest'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kyungdong Invest may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Kyungdong Invest actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Kyungdong Invest has net cash of ₩59.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in ₩13b. So we don't think Kyungdong Invest's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Kyungdong Invest, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.