Is KISCO (KRX:104700) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that KISCO Corp. (KRX:104700) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for KISCO

What Is KISCO's Net Debt?

As you can see below, at the end of September 2020, KISCO had ₩5.43b of debt, up from ₩3.26b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩421.1b in cash, so it actually has ₩415.7b net cash.

A Look At KISCO's Liabilities

We can see from the most recent balance sheet that KISCO had liabilities of ₩89.8b falling due within a year, and liabilities of ₩21.6b due beyond that. On the other hand, it had cash of ₩421.1b and ₩94.1b worth of receivables due within a year. So it actually has ₩403.9b more liquid assets than total liabilities.

This luscious liquidity implies that KISCO'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 KISCO has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that KISCO has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is KISCO's earnings that will influence how the balance sheet holds up in the future. 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. While KISCO 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. Over the last three years, KISCO actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that KISCO has net cash of ₩415.7b and plenty of liquid assets. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in ₩71b. The bottom line is that KISCO's use of debt is absolutely fine. 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 example, we've discovered 2 warning signs for KISCO (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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