Is Kumkang Kind (KRX:014280) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kumkang Kind Co., Ltd. (KRX:014280) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Kumkang Kind

What Is Kumkang Kind's Debt?

The image below, which you can click on for greater detail, shows that Kumkang Kind had debt of ₩309.7b at the end of December 2020, a reduction from ₩349.9b over a year. However, because it has a cash reserve of ₩85.5b, its net debt is less, at about ₩224.2b.

A Look At Kumkang Kind's Liabilities

According to the last reported balance sheet, Kumkang Kind had liabilities of ₩352.3b due within 12 months, and liabilities of ₩73.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩85.5b as well as receivables valued at ₩108.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩231.6b.

Given this deficit is actually higher than the company's market capitalization of ₩181.2b, we think shareholders really should watch Kumkang Kind's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 8.7%, to ₩502b. That's not what we would hope to see.

Caveat Emptor

Importantly, Kumkang Kind had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩2.5b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩28b in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Kumkang Kind (2 are a bit concerning) you should be aware of.

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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