Does KEYEAST.Co.Ltd (KOSDAQ:054780) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, KEYEAST.Co.,Ltd. (KOSDAQ:054780) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for KEYEAST.Co.Ltd

What Is KEYEAST.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 KEYEAST.Co.Ltd had ₩12.4b of debt, an increase on none, over one year. However, it does have ₩19.8b in cash offsetting this, leading to net cash of ₩7.44b.

How Strong Is KEYEAST.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that KEYEAST.Co.Ltd had liabilities of ₩27.4b due within 12 months and liabilities of ₩708.2m due beyond that. On the other hand, it had cash of ₩19.8b and ₩4.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.74b.

Having regard to KEYEAST.Co.Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩192.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, KEYEAST.Co.Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that KEYEAST.Co.Ltd improved its EBIT from a last year's loss to a positive ₩1.6b. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KEYEAST.Co.Ltd'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. KEYEAST.Co.Ltd 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 year, KEYEAST.Co.Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about KEYEAST.Co.Ltd's liabilities, but we can be reassured by the fact it has has net cash of ₩7.44b. So although we see some areas for improvement, we're not too worried about KEYEAST.Co.Ltd's balance sheet. 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 example, we've discovered 3 warning signs for KEYEAST.Co.Ltd (2 are potentially serious!) that you should be aware of before investing here.

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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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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