Stock Analysis

Does Korea Export Packaging IndustrialLtd (KRX:002200) Have A Healthy Balance Sheet?

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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.' 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 Korea Export Packaging Industrial Co.,Ltd (KRX:002200) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Korea Export Packaging IndustrialLtd

How Much Debt Does Korea Export Packaging IndustrialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Korea Export Packaging IndustrialLtd had ₩4.53b of debt in September 2020, down from ₩7.21b, one year before. But it also has ₩37.8b in cash to offset that, meaning it has ₩33.3b net cash.

KOSE:A002200 Debt to Equity History February 25th 2021

How Strong Is Korea Export Packaging IndustrialLtd's Balance Sheet?

We can see from the most recent balance sheet that Korea Export Packaging IndustrialLtd had liabilities of ₩38.8b falling due within a year, and liabilities of ₩19.8b due beyond that. Offsetting these obligations, it had cash of ₩37.8b as well as receivables valued at ₩47.4b due within 12 months. So it can boast ₩26.6b more liquid assets than total liabilities.

This excess liquidity suggests that Korea Export Packaging IndustrialLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Korea Export Packaging IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Korea Export Packaging IndustrialLtd's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Korea Export Packaging IndustrialLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Korea Export Packaging IndustrialLtd 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, Korea Export Packaging IndustrialLtd 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 Korea Export Packaging IndustrialLtd has ₩33.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩16b, being 132% of its EBIT. So is Korea Export Packaging IndustrialLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Korea Export Packaging IndustrialLtd you should be aware of.

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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