Benoholdings (KOSDAQ:206400) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Benoholdings, Inc. (KOSDAQ:206400) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Benoholdings

What Is Benoholdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Benoholdings had ₩10.2b of debt, an increase on none, over one year. However, it does have ₩35.5b in cash offsetting this, leading to net cash of ₩25.3b.

How Strong Is Benoholdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Benoholdings had liabilities of ₩29.6b due within 12 months and liabilities of ₩180.2m due beyond that. On the other hand, it had cash of ₩35.5b and ₩706.8m worth of receivables due within a year. So it actually has ₩6.35b more liquid assets than total liabilities.

This surplus suggests that Benoholdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Benoholdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Benoholdings's EBIT launched higher than Elon Musk, gaining a whopping 189% on last year. 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 Benoholdings will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Benoholdings 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 two years, Benoholdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Benoholdings has ₩25.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 189% over the last year. So we are not troubled with Benoholdings's debt use. 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. For instance, we've identified 2 warning signs for Benoholdings 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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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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