Is KPX HoldingsLtd (KRX:092230) 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 note that KPX Holdings Co.,Ltd. (KRX:092230) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KPX HoldingsLtd

How Much Debt Does KPX HoldingsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 KPX HoldingsLtd had ₩135.9b of debt, an increase on ₩122.4b, over one year. But on the other hand it also has ₩333.1b in cash, leading to a ₩197.3b net cash position.

How Strong Is KPX HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that KPX HoldingsLtd had liabilities of ₩229.5b due within a year, and liabilities of ₩100.6b falling due after that. On the other hand, it had cash of ₩333.1b and ₩154.1b worth of receivables due within a year. So it actually has ₩157.2b more liquid assets than total liabilities.

This luscious liquidity implies that KPX HoldingsLtd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that KPX HoldingsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that KPX HoldingsLtd grew its EBIT at 19% over the last year, further increasing its ability to manage 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 HoldingsLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KPX HoldingsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, KPX HoldingsLtd produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case KPX HoldingsLtd has ₩197.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't think KPX HoldingsLtd's use of debt is risky. 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. For example, we've discovered 3 warning signs for KPX HoldingsLtd that you should be aware of before investing here.

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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