We Think Kyungdong Invest (KRX:012320) Can Stay On Top Of Its Debt

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.' 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 Kyungdong Invest Co., Ltd (KRX:012320) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kyungdong Invest

What Is Kyungdong Invest's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Kyungdong Invest had ₩86.6b of debt in September 2020, down from ₩98.2b, one year before. But on the other hand it also has ₩117.7b in cash, leading to a ₩31.1b net cash position.

How Healthy Is Kyungdong Invest's Balance Sheet?

The latest balance sheet data shows that Kyungdong Invest had liabilities of ₩70.5b due within a year, and liabilities of ₩104.6b falling due after that. Offsetting this, it had ₩117.7b in cash and ₩46.2b in receivables that were due within 12 months. So it has liabilities totalling ₩11.3b more than its cash and near-term receivables, combined.

Since publicly traded Kyungdong Invest shares are worth a total of ₩66.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kyungdong Invest also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Kyungdong Invest's load is not too heavy, because its EBIT was down 62% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kyungdong Invest will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Kyungdong Invest produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Kyungdong Invest does have more liabilities than liquid assets, it also has net cash of ₩31.1b. So we are not troubled with Kyungdong Invest's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Kyungdong Invest (of which 1 is significant!) you should know about.

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. 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.
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