Does Kiswire (KRX:002240) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Kiswire Ltd. (KRX:002240) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kiswire

What Is Kiswire's Debt?

The image below, which you can click on for greater detail, shows that Kiswire had debt of ₩412.8b at the end of September 2020, a reduction from ₩481.3b over a year. However, because it has a cash reserve of ₩149.6b, its net debt is less, at about ₩263.2b.

How Strong Is Kiswire's Balance Sheet?

We can see from the most recent balance sheet that Kiswire had liabilities of ₩569.0b falling due within a year, and liabilities of ₩198.3b due beyond that. Offsetting these obligations, it had cash of ₩149.6b as well as receivables valued at ₩353.2b due within 12 months. So its liabilities total ₩264.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩382.8b, so it does suggest shareholders should keep an eye on Kiswire's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kiswire will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Kiswire made a loss at the EBIT level, and saw its revenue drop to ₩1.4t, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

Not only did Kiswire's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩10b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩25b into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Kiswire (1 can't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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