These 4 Measures Indicate That KT Skylife (KRX:053210) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that KT Skylife Co., Ltd. (KRX:053210) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KT Skylife

How Much Debt Does KT Skylife Carry?

The chart below, which you can click on for greater detail, shows that KT Skylife had ₩3.00b in debt in September 2020; about the same as the year before. But it also has ₩362.7b in cash to offset that, meaning it has ₩359.7b net cash.

A Look At KT Skylife's Liabilities

The latest balance sheet data shows that KT Skylife had liabilities of ₩153.0b due within a year, and liabilities of ₩22.4b falling due after that. On the other hand, it had cash of ₩362.7b and ₩113.7b worth of receivables due within a year. So it actually has ₩300.9b more liquid assets than total liabilities.

This surplus strongly suggests that KT Skylife has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that KT Skylife has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that KT Skylife grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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 KT Skylife 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.

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. Happily for any shareholders, KT Skylife actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KT Skylife has net cash of ₩359.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩103b, being 132% of its EBIT. The bottom line is that KT Skylife's use of debt is absolutely fine. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that KT Skylife is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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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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