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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, at the end of December 2020, KEYEAST.Co.Ltd had ₩12.7b of debt, up from ₩11.6b a year ago. Click the image for more detail. However, it does have ₩21.3b in cash offsetting this, leading to net cash of ₩8.67b.

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

According to the last reported balance sheet, KEYEAST.Co.Ltd had liabilities of ₩27.9b due within 12 months, and liabilities of ₩527.9m due beyond 12 months. Offsetting these obligations, it had cash of ₩21.3b as well as receivables valued at ₩8.08b due within 12 months. So it actually has ₩981.9m more liquid assets than total liabilities.

This state of affairs indicates that KEYEAST.Co.Ltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩293.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that KEYEAST.Co.Ltd has more cash than debt is arguably a good indication that 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 ₩1.7b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if KEYEAST.Co.Ltd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, KEYEAST.Co.Ltd saw substantial negative free cash flow, in total. 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

While we empathize with investors who find debt concerning, you should keep in mind that KEYEAST.Co.Ltd has net cash of ₩8.67b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about KEYEAST.Co.Ltd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that KEYEAST.Co.Ltd is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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