Is Kiswire (KRX:002240) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kiswire Ltd. (KRX:002240) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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.

A Look At Kiswire's Liabilities

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. On the other hand, it had cash of ₩149.6b and ₩353.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩264.5b.

This is a mountain of leverage relative to its market capitalization of ₩331.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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%. We would much prefer see growth.

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. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩25b into a profit. In the meantime, we consider the stock very 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Kiswire (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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