We Think Korea Alcohol Industrial (KOSDAQ:017890) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Korea Alcohol Industrial Co., Ltd. (KOSDAQ:017890) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Korea Alcohol Industrial

What Is Korea Alcohol Industrial's Net Debt?

As you can see below, at the end of September 2020, Korea Alcohol Industrial had ₩49.2b of debt, up from ₩40.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩79.0b in cash, so it actually has ₩29.8b net cash.

A Look At Korea Alcohol Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Korea Alcohol Industrial had liabilities of ₩58.5b due within 12 months and liabilities of ₩54.8b due beyond that. Offsetting these obligations, it had cash of ₩79.0b as well as receivables valued at ₩71.3b due within 12 months. So it actually has ₩36.9b more liquid assets than total liabilities.

This surplus suggests that Korea Alcohol Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Korea Alcohol Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Korea Alcohol Industrial grew its EBIT by 70% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Korea Alcohol Industrial 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 Korea Alcohol Industrial 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. In the last three years, Korea Alcohol Industrial's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Korea Alcohol Industrial has net cash of ₩29.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 70% over the last year. So we don't think Korea Alcohol Industrial'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 Korea Alcohol Industrial's earnings per share history for free.

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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