Does Kangnam Jevisco (KRX:000860) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Kangnam Jevisco Co., Ltd (KRX:000860) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kangnam Jevisco

What Is Kangnam Jevisco's Debt?

As you can see below, at the end of December 2020, Kangnam Jevisco had ₩18.1b of debt, up from ₩2.09b a year ago. Click the image for more detail. But it also has ₩76.0b in cash to offset that, meaning it has ₩57.9b net cash.

How Healthy Is Kangnam Jevisco's Balance Sheet?

According to the last reported balance sheet, Kangnam Jevisco had liabilities of ₩68.6b due within 12 months, and liabilities of ₩61.1b due beyond 12 months. Offsetting this, it had ₩76.0b in cash and ₩71.6b in receivables that were due within 12 months. So it can boast ₩17.9b more liquid assets than total liabilities.

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

It was also good to see that despite losing money on the EBIT line last year, Kangnam Jevisco turned things around in the last 12 months, delivering and EBIT of ₩2.7b. There's no doubt that we learn most about debt from the balance sheet. But it is Kangnam Jevisco'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 company can only pay off debt with cold hard cash, not accounting profits. Kangnam Jevisco 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. Happily for any shareholders, Kangnam Jevisco actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kangnam Jevisco has net cash of ₩57.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 322% of that EBIT to free cash flow, bringing in ₩8.6b. So is Kangnam Jevisco's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Kangnam Jevisco (including 1 which is a bit concerning) .

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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