KM (KOSDAQ:083550) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, KM Corporation (KOSDAQ:083550) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KM

How Much Debt Does KM Carry?

You can click the graphic below for the historical numbers, but it shows that KM had ₩23.2b of debt in December 2020, down from ₩24.4b, one year before. But on the other hand it also has ₩38.7b in cash, leading to a ₩15.5b net cash position.

How Healthy Is KM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KM had liabilities of ₩45.7b due within 12 months and liabilities of ₩10.4b due beyond that. Offsetting these obligations, it had cash of ₩38.7b as well as receivables valued at ₩22.2b due within 12 months. So it can boast ₩4.71b more liquid assets than total liabilities.

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

Even more impressive was the fact that KM grew its EBIT by 488% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KM will need earnings to service that debt. 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. While KM 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. Over the last three years, KM reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case KM has ₩15.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 488% year-on-year EBIT growth. So we don't think KM's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of KM's earnings per share history for free.

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. 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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