We Think KidariStudio (KRX:020120) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that KidariStudio, Inc. (KRX:020120) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for KidariStudio

How Much Debt Does KidariStudio Carry?

As you can see below, KidariStudio had ₩17.6b of debt at September 2024, down from ₩24.5b a year prior. But it also has ₩68.2b in cash to offset that, meaning it has ₩50.6b net cash.

How Strong Is KidariStudio's Balance Sheet?

We can see from the most recent balance sheet that KidariStudio had liabilities of ₩110.6b falling due within a year, and liabilities of ₩24.2b due beyond that. Offsetting these obligations, it had cash of ₩68.2b as well as receivables valued at ₩17.7b due within 12 months. So it has liabilities totalling ₩48.8b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since KidariStudio has a market capitalization of ₩130.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, KidariStudio also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that KidariStudio improved its EBIT from a last year's loss to a positive ₩1.2b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since KidariStudio 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While KidariStudio has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, KidariStudio actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although KidariStudio's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩50.6b. And it impressed us with free cash flow of ₩16b, being 1,353% of its EBIT. So we don't have any problem with KidariStudio's use of debt. 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. Be aware that KidariStudio is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.