We Think Ncsoft (KRX:036570) Can Manage Its Debt With Ease

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.' 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 Ncsoft Corporation (KRX:036570) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ncsoft

What Is Ncsoft's Debt?

As you can see below, Ncsoft had ₩255.1b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩2.21t in cash, leading to a ₩1.95t net cash position.

A Look At Ncsoft's Liabilities

Zooming in on the latest balance sheet data, we can see that Ncsoft had liabilities of ₩463.1b due within 12 months and liabilities of ₩519.7b due beyond that. Offsetting this, it had ₩2.21t in cash and ₩206.3b in receivables that were due within 12 months. So it actually has ₩1.43t more liquid assets than total liabilities.

This short term liquidity is a sign that Ncsoft could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ncsoft has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Ncsoft grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ncsoft's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ncsoft 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. During the last three years, Ncsoft produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Ncsoft has ₩1.95t in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 79% over the last year. So is Ncsoft's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Ncsoft's earnings per share history for free.

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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