INFINITT Healthcare (KOSDAQ:071200) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies INFINITT Healthcare Co., Ltd. (KOSDAQ:071200) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for INFINITT Healthcare

What Is INFINITT Healthcare's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 INFINITT Healthcare had debt of ₩2.83b, up from ₩1.19b in one year. However, its balance sheet shows it holds ₩48.2b in cash, so it actually has ₩45.4b net cash.

How Strong Is INFINITT Healthcare's Balance Sheet?

The latest balance sheet data shows that INFINITT Healthcare had liabilities of ₩18.6b due within a year, and liabilities of ₩4.16b falling due after that. On the other hand, it had cash of ₩48.2b and ₩23.6b worth of receivables due within a year. So it actually has ₩49.1b more liquid assets than total liabilities.

This surplus suggests that INFINITT Healthcare 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 INFINITT Healthcare has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for INFINITT Healthcare if management cannot prevent a repeat of the 36% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since INFINITT Healthcare 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. While INFINITT Healthcare 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 two years, INFINITT Healthcare produced sturdy free cash flow equating to 78% 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 it is always sensible to investigate a company's debt, in this case INFINITT Healthcare has ₩45.4b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in ₩12b. So we don't think INFINITT Healthcare's use of debt is risky. 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. Be aware that INFINITT Healthcare is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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