Interpark (KOSDAQ:035080) Seems To Use Debt Quite Sensibly

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.' 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 note that Interpark Co., Ltd. (KOSDAQ:035080) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Interpark

What Is Interpark's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Interpark had ₩59.6b of debt, an increase on ₩53.3b, over one year. However, its balance sheet shows it holds ₩304.2b in cash, so it actually has ₩244.6b net cash.

How Strong Is Interpark's Balance Sheet?

We can see from the most recent balance sheet that Interpark had liabilities of ₩842.4b falling due within a year, and liabilities of ₩128.0b due beyond that. Offsetting this, it had ₩304.2b in cash and ₩560.3b in receivables that were due within 12 months. So its liabilities total ₩105.8b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩174.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Interpark also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Interpark if management cannot prevent a repeat of the 75% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Interpark's earnings that will influence how the balance sheet holds up in the future. 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. Interpark 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, Interpark 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 Interpark does have more liabilities than liquid assets, it also has net cash of ₩244.6b. The cherry on top was that in converted 199% of that EBIT to free cash flow, bringing in -₩86b. So we are not troubled with Interpark's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Interpark (1 is concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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