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.' 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, KISCO Holdings Corp. (KRX:001940) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for KISCO Holdings

What Is KISCO Holdings's Debt?

As you can see below, KISCO Holdings had ₩13.0b of debt at December 2020, down from ₩25.0b a year prior. However, its balance sheet shows it holds ₩869.7b in cash, so it actually has ₩856.7b net cash.

How Healthy Is KISCO Holdings' Balance Sheet?

We can see from the most recent balance sheet that KISCO Holdings had liabilities of ₩196.7b falling due within a year, and liabilities of ₩33.0b due beyond that. Offsetting these obligations, it had cash of ₩869.7b as well as receivables valued at ₩163.1b due within 12 months. So it actually has ₩803.0b more liquid assets than total liabilities.

This surplus strongly suggests that KISCO Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that KISCO Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, KISCO Holdings grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is KISCO Holdings'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. 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 100% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case KISCO Holdings has ₩856.7b in net cash and a strong balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in ₩121b. The bottom line is that KISCO Holdings's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example KISCO Holdings has 2 warning signs (and 1 which is significant) we think you should know about.

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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