Is Taegu Broadcasting (KOSDAQ:033830) 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. As with many other companies Taegu Broadcasting Corporation (KOSDAQ:033830) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taegu Broadcasting

What Is Taegu Broadcasting's Net Debt?

As you can see below, Taegu Broadcasting had ₩3.93b of debt at June 2020, down from ₩6.61b a year prior. However, it does have ₩65.8b in cash offsetting this, leading to net cash of ₩61.9b.

A Look At Taegu Broadcasting's Liabilities

Zooming in on the latest balance sheet data, we can see that Taegu Broadcasting had liabilities of ₩6.96b due within 12 months and liabilities of ₩1.87b due beyond that. Offsetting these obligations, it had cash of ₩65.8b as well as receivables valued at ₩11.5b due within 12 months. So it can boast ₩68.5b more liquid assets than total liabilities.

This luscious liquidity implies that Taegu Broadcasting's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Taegu Broadcasting has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Taegu Broadcasting grew its EBIT by 145% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Taegu Broadcasting 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Taegu Broadcasting 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. In the last three years, Taegu Broadcasting's free cash flow amounted to 28% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Taegu Broadcasting has ₩61.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 145% year-on-year EBIT growth. So we don't think Taegu Broadcasting's use of debt is risky. 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 2 warning signs for Taegu Broadcasting that you should be aware of.

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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