Is KC Feed (KOSDAQ:025880) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that KC Feed Co., Ltd. (KOSDAQ:025880) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KC Feed

What Is KC Feed's Net Debt?

As you can see below, at the end of September 2020, KC Feed had ₩44.5b of debt, up from ₩42.8b a year ago. Click the image for more detail. However, it also had ₩21.6b in cash, and so its net debt is ₩22.9b.

A Look At KC Feed's Liabilities

We can see from the most recent balance sheet that KC Feed had liabilities of ₩38.2b falling due within a year, and liabilities of ₩14.0b due beyond that. Offsetting this, it had ₩21.6b in cash and ₩19.3b in receivables that were due within 12 months. So its liabilities total ₩11.4b more than the combination of its cash and short-term receivables.

KC Feed has a market capitalization of ₩34.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is KC Feed'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.

In the last year KC Feed wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to ₩67b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, KC Feed had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩242m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for KC Feed you should be aware of, and 1 of them is significant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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