These 4 Measures Indicate That Kyungdong Invest (KRX:012320) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kyungdong Invest Co., Ltd (KRX:012320) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Kyungdong Invest

What Is Kyungdong Invest's Debt?

As you can see below, Kyungdong Invest had ₩77.4b of debt at December 2020, down from ₩98.6b a year prior. But it also has ₩104.4b in cash to offset that, meaning it has ₩26.9b net cash.

A Look At Kyungdong Invest's Liabilities

According to the last reported balance sheet, Kyungdong Invest had liabilities of ₩74.5b due within 12 months, and liabilities of ₩84.0b due beyond 12 months. Offsetting these obligations, it had cash of ₩104.4b as well as receivables valued at ₩68.1b due within 12 months. So it can boast ₩13.9b more liquid assets than total liabilities.

This surplus suggests that Kyungdong Invest is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Kyungdong Invest has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Kyungdong Invest has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kyungdong Invest 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, Kyungdong Invest produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Kyungdong Invest has ₩26.9b in net cash and a decent-looking balance sheet. So we don't have any problem with Kyungdong Invest's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kyungdong Invest (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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