iFamilySC (KOSDAQ:114840) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, iFamilySC Co., Ltd. (KOSDAQ:114840) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for iFamilySC

What Is iFamilySC's Net Debt?

The chart below, which you can click on for greater detail, shows that iFamilySC had ₩10.0b in debt in March 2024; about the same as the year before. However, it does have ₩45.6b in cash offsetting this, leading to net cash of ₩35.6b.

How Strong Is iFamilySC's Balance Sheet?

The latest balance sheet data shows that iFamilySC had liabilities of ₩31.0b due within a year, and liabilities of ₩10.1b falling due after that. Offsetting these obligations, it had cash of ₩45.6b as well as receivables valued at ₩17.8b due within 12 months. So it actually has ₩22.3b more liquid assets than total liabilities.

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

Better yet, iFamilySC grew its EBIT by 151% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine iFamilySC'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. iFamilySC 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. Looking at the most recent two years, iFamilySC recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that iFamilySC has net cash of ₩35.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 151% year-on-year EBIT growth. So is iFamilySC's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for iFamilySC you should be aware of, and 1 of them is potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com