KOLMAR BNH (KOSDAQ:200130) Has A Rock Solid Balance Sheet

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 can see that KOLMAR BNH Co., Ltd. (KOSDAQ:200130) does use debt in its business. But is this debt a concern to shareholders?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for KOLMAR BNH

How Much Debt Does KOLMAR BNH Carry?

The image below, which you can click on for greater detail, shows that at September 2020 KOLMAR BNH had debt of ₩30.3b, up from ₩11.6b in one year. However, it does have ₩128.2b in cash offsetting this, leading to net cash of ₩97.9b.

How Healthy Is KOLMAR BNH's Balance Sheet?

The latest balance sheet data shows that KOLMAR BNH had liabilities of ₩128.5b due within a year, and liabilities of ₩19.6b falling due after that. Offsetting these obligations, it had cash of ₩128.2b as well as receivables valued at ₩54.1b due within 12 months. So it can boast ₩34.1b more liquid assets than total liabilities.

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

On top of that, KOLMAR BNH grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if KOLMAR BNH can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KOLMAR BNH 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. In the last three years, KOLMAR BNH's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case KOLMAR BNH has ₩97.9b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 46% over the last year. So we don't think KOLMAR BNH's use of debt 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. Take risks, for example - KOLMAR BNH has 1 warning sign we think you should be aware of.

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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