Kolon Plastics (KRX:138490) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Kolon Plastics, Inc. (KRX:138490) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kolon Plastics

How Much Debt Does Kolon Plastics Carry?

As you can see below, Kolon Plastics had ₩74.9b of debt at September 2020, down from ₩84.2b a year prior. However, because it has a cash reserve of ₩18.2b, its net debt is less, at about ₩56.7b.

How Healthy Is Kolon Plastics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kolon Plastics had liabilities of ₩95.5b due within 12 months and liabilities of ₩38.5b due beyond that. Offsetting these obligations, it had cash of ₩18.2b as well as receivables valued at ₩44.2b due within 12 months. So its liabilities total ₩71.6b more than the combination of its cash and short-term receivables.

Kolon Plastics has a market capitalization of ₩225.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kolon Plastics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kolon Plastics made a loss at the EBIT level, and saw its revenue drop to ₩288b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Kolon Plastics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩2.7b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩2.8b into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Kolon Plastics you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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