Is NDFOS (KOSDAQ:238090) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that NDFOS Co., Ltd. (KOSDAQ:238090) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NDFOS

What Is NDFOS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NDFOS had ₩21.4b of debt in September 2020, down from ₩50.3b, one year before. However, it does have ₩54.8b in cash offsetting this, leading to net cash of ₩33.5b.

How Healthy Is NDFOS' Balance Sheet?

According to the last reported balance sheet, NDFOS had liabilities of ₩26.7b due within 12 months, and liabilities of ₩9.89b due beyond 12 months. Offsetting this, it had ₩54.8b in cash and ₩12.9b in receivables that were due within 12 months. So it actually has ₩31.2b more liquid assets than total liabilities.

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

The bad news is that NDFOS saw its EBIT decline by 10% over the last year. If that sort of decline is not arrested, then the managing its debt will be harder than selling broccoli flavoured ice-cream for a premium. There's no doubt that we learn most about debt from the balance sheet. But it is NDFOS's earnings that will influence how the balance sheet holds up in the future. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While NDFOS 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. Happily for any shareholders, NDFOS actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case NDFOS has ₩33.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in ₩48b. So we don't have any problem with NDFOS's use of debt. 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. Be aware that NDFOS is showing 4 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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