KT Skylife (KRX:053210) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, KT Skylife Co., Ltd. (KRX:053210) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for KT Skylife

How Much Debt Does KT Skylife Carry?

The image below, which you can click on for greater detail, shows that at December 2020 KT Skylife had debt of ₩3.20b, up from ₩3.00b in one year. But it also has ₩327.7b in cash to offset that, meaning it has ₩324.5b net cash.

A Look At KT Skylife's Liabilities

The latest balance sheet data shows that KT Skylife had liabilities of ₩153.2b due within a year, and liabilities of ₩21.8b falling due after that. Offsetting these obligations, it had cash of ₩327.7b as well as receivables valued at ₩94.7b due within 12 months. So it actually has ₩247.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that KT Skylife's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that KT Skylife has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that KT Skylife has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is KT Skylife's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. KT Skylife 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 three years, KT Skylife actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KT Skylife has net cash of ₩324.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in ₩95b. When it comes to KT Skylife's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for KT Skylife (of which 1 is significant!) you should know about.

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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