Health Check: How Prudently Does Kangnam Jevisco (KRX:000860) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Kangnam Jevisco Co., Ltd (KRX:000860) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kangnam Jevisco

What Is Kangnam Jevisco's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Kangnam Jevisco had ₩18.1b of debt, an increase on ₩3.61b, over one year. However, it does have ₩77.0b in cash offsetting this, leading to net cash of ₩58.9b.

How Strong Is Kangnam Jevisco's Balance Sheet?

According to the last reported balance sheet, Kangnam Jevisco had liabilities of ₩63.8b due within 12 months, and liabilities of ₩71.6b due beyond 12 months. On the other hand, it had cash of ₩77.0b and ₩70.3b worth of receivables due within a year. So it actually has ₩11.9b 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. 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.

In the last year Kangnam Jevisco's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Kangnam Jevisco?

While Kangnam Jevisco lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩16b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 Kangnam Jevisco is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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