KPX ChemicalLtd (KRX:025000) Has A Rock Solid Balance Sheet

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.' 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 note that KPX Chemical Co.,Ltd. (KRX:025000) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KPX ChemicalLtd

What Is KPX ChemicalLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 KPX ChemicalLtd had debt of ₩9.39b, up from ₩5.58b in one year. But on the other hand it also has ₩161.4b in cash, leading to a ₩152.1b net cash position.

How Healthy Is KPX ChemicalLtd's Balance Sheet?

The latest balance sheet data shows that KPX ChemicalLtd had liabilities of ₩93.7b due within a year, and liabilities of ₩9.70b falling due after that. On the other hand, it had cash of ₩161.4b and ₩126.1b worth of receivables due within a year. So it can boast ₩184.2b more liquid assets than total liabilities.

This luscious liquidity implies that KPX ChemicalLtd's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that KPX ChemicalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, KPX ChemicalLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since KPX ChemicalLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KPX ChemicalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, KPX ChemicalLtd generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KPX ChemicalLtd has net cash of ₩152.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₩88b. At the end of the day we're not concerned about KPX ChemicalLtd's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for KPX ChemicalLtd that 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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