Is Kumkang Kind (KRX:014280) Using Too Much Debt?

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, Kumkang Kind Co., Ltd. (KRX:014280) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kumkang Kind

How Much Debt Does Kumkang Kind Carry?

You can click the graphic below for the historical numbers, but it shows that Kumkang Kind had ₩310.1b of debt in September 2020, down from ₩373.0b, one year before. However, it does have ₩89.5b in cash offsetting this, leading to net debt of about ₩220.7b.

How Strong Is Kumkang Kind's Balance Sheet?

The latest balance sheet data shows that Kumkang Kind had liabilities of ₩369.0b due within a year, and liabilities of ₩67.1b falling due after that. On the other hand, it had cash of ₩89.5b and ₩128.9b worth of receivables due within a year. So its liabilities total ₩217.7b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₩149.0b, we think shareholders really should watch Kumkang Kind's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Kumkang Kind'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.

In the last year Kumkang Kind had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩500b. We would much prefer see growth.

Caveat Emptor

While Kumkang Kind's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩2.2b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩3.7b and the profit of ₩130m. So one might argue that there's still a chance it can get things on the right track. 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. Case in point: We've spotted 7 warning signs for Kumkang Kind you should be aware of, and 2 of them are significant.

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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