Is i-SENS (KOSDAQ:099190) Using Too Much Debt?

Warren Buffett famously said, '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. We can see that i-SENS, Inc. (KOSDAQ:099190) does use debt in its business. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for i-SENS

What Is i-SENS's Net Debt?

As you can see below, at the end of September 2020, i-SENS had ₩49.8b of debt, up from ₩36.7b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩76.3b in cash, so it actually has ₩26.5b net cash.

How Strong Is i-SENS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that i-SENS had liabilities of ₩37.4b due within 12 months and liabilities of ₩44.4b due beyond that. Offsetting this, it had ₩76.3b in cash and ₩40.8b in receivables that were due within 12 months. So it can boast ₩35.4b more liquid assets than total liabilities.

This short term liquidity is a sign that i-SENS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that i-SENS has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, i-SENS saw its EBIT drop by 6.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine i-SENS's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While i-SENS 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 most recent three years, i-SENS recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that i-SENS has net cash of ₩26.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩26b, being 75% of its EBIT. So is i-SENS's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - i-SENS has 2 warning signs we think you should be aware of.

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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