These 4 Measures Indicate That Kolon Mobility Group (KRX:450140) Is Using Debt In A Risky Way

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. We can see that Kolon Mobility Group Corporation (KRX:450140) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Kolon Mobility Group's Debt?

As you can see below, at the end of December 2024, Kolon Mobility Group had ₩375.0b of debt, up from ₩285.8b a year ago. Click the image for more detail. On the flip side, it has ₩31.3b in cash leading to net debt of about ₩343.6b.

How Healthy Is Kolon Mobility Group's Balance Sheet?

The latest balance sheet data shows that Kolon Mobility Group had liabilities of ₩470.3b due within a year, and liabilities of ₩237.7b falling due after that. Offsetting these obligations, it had cash of ₩31.3b as well as receivables valued at ₩81.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩595.4b.

This deficit casts a shadow over the ₩249.9b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Kolon Mobility Group would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Kolon Mobility Group

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Kolon Mobility Group shareholders face the double whammy of a high net debt to EBITDA ratio (5.2), and fairly weak interest coverage, since EBIT is just 0.86 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, Kolon Mobility Group saw its EBIT tank 58% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kolon Mobility Group will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last two years, Kolon Mobility Group's free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Kolon Mobility Group's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering all the factors previously mentioned, we think that Kolon Mobility Group really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kolon Mobility Group is showing 5 warning signs in our investment analysis , and 3 of those are potentially serious...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.