Kyungdong Invest (KRX:012320) Has A Rock Solid Balance Sheet

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.' 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. Importantly, Kyungdong Invest Co., Ltd (KRX:012320) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kyungdong Invest

How Much Debt Does Kyungdong Invest Carry?

The image below, which you can click on for greater detail, shows that Kyungdong Invest had debt of ₩31.3b at the end of September 2024, a reduction from ₩47.7b over a year. But it also has ₩96.0b in cash to offset that, meaning it has ₩64.7b net cash.

A Look At Kyungdong Invest's Liabilities

Zooming in on the latest balance sheet data, we can see that Kyungdong Invest had liabilities of ₩59.4b due within 12 months and liabilities of ₩68.5b due beyond that. Offsetting these obligations, it had cash of ₩96.0b as well as receivables valued at ₩44.2b due within 12 months. So it actually has ₩12.2b more liquid assets than total liabilities.

This surplus suggests that Kyungdong Invest has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kyungdong Invest has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Kyungdong Invest grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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 Kyungdong Invest has net cash of ₩64.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩38b, being 153% of its EBIT. So is Kyungdong Invest's debt a risk? It doesn't seem so to us. 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.