Does KISCO Holdings (KRX:001940) Have A Healthy Balance Sheet?

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.' 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 can see that KISCO Holdings Corp. (KRX:001940) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KISCO Holdings

How Much Debt Does KISCO Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 KISCO Holdings had ₩20.5b of debt, an increase on ₩16.0b, over one year. However, it does have ₩838.2b in cash offsetting this, leading to net cash of ₩817.8b.

How Healthy Is KISCO Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KISCO Holdings had liabilities of ₩125.2b due within 12 months and liabilities of ₩42.9b due beyond that. Offsetting this, it had ₩838.2b in cash and ₩173.3b in receivables that were due within 12 months. So it actually has ₩843.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that KISCO Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, KISCO Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that KISCO Holdings has seen its EBIT plunge 10% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since KISCO Holdings 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. KISCO Holdings 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. During the last three years, KISCO Holdings generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that KISCO Holdings has net cash of ₩817.8b and plenty of liquid assets. And it impressed us with free cash flow of ₩108b, being 85% of its EBIT. So we don't think KISCO Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that KISCO Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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