Is IokCompany (KOSDAQ:078860) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that IokCompany Co., Ltd. (KOSDAQ:078860) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IokCompany

What Is IokCompany's Debt?

As you can see below, at the end of September 2020, IokCompany had ₩49.2b of debt, up from ₩32.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩70.4b in cash, so it actually has ₩21.3b net cash.

A Look At IokCompany's Liabilities

The latest balance sheet data shows that IokCompany had liabilities of ₩29.2b due within a year, and liabilities of ₩31.5b falling due after that. Offsetting this, it had ₩70.4b in cash and ₩2.39b in receivables that were due within 12 months. So it can boast ₩12.1b more liquid assets than total liabilities.

This surplus suggests that IokCompany has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, IokCompany boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since IokCompany 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.

In the last year IokCompany wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to ₩59b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is IokCompany?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that IokCompany had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩1.6b and booked a ₩1.1b accounting loss. Given it only has net cash of ₩21.3b, the company may need to raise more capital if it doesn't reach break-even soon. IokCompany's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with IokCompany (including 1 which is significant) .

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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