Would NPKLtd (KOSDAQ:048830) Be Better Off With Less Debt?

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. We can see that NPK Co.,Ltd (KOSDAQ:048830) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NPKLtd

What Is NPKLtd's Net Debt?

The image below, which you can click on for greater detail, shows that NPKLtd had debt of ₩15.2b at the end of September 2020, a reduction from ₩15.8b over a year. However, it also had ₩10.9b in cash, and so its net debt is ₩4.21b.

How Healthy Is NPKLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NPKLtd had liabilities of ₩18.9b due within 12 months and liabilities of ₩19.9b due beyond that. On the other hand, it had cash of ₩10.9b and ₩8.35b worth of receivables due within a year. So it has liabilities totalling ₩19.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since NPKLtd has a market capitalization of ₩36.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is NPKLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, NPKLtd reported revenue of ₩65b, which is a gain of 5.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, NPKLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.4b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩143m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with NPKLtd (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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