Is PSK HOLDINGS (KOSDAQ:031980) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that PSK HOLDINGS Inc. (KOSDAQ:031980) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for PSK HOLDINGS

How Much Debt Does PSK HOLDINGS Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 PSK HOLDINGS had ₩19.0b of debt, an increase on ₩17.0b, over one year. However, it does have ₩130.4b in cash offsetting this, leading to net cash of ₩111.4b.

A Look At PSK HOLDINGS' Liabilities

Zooming in on the latest balance sheet data, we can see that PSK HOLDINGS had liabilities of ₩35.1b due within 12 months and liabilities of ₩25.0b due beyond that. On the other hand, it had cash of ₩130.4b and ₩15.5b worth of receivables due within a year. So it actually has ₩85.8b more liquid assets than total liabilities.

This surplus suggests that PSK HOLDINGS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PSK HOLDINGS has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, PSK HOLDINGS grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PSK HOLDINGS'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. PSK HOLDINGS 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 most recent three years, PSK HOLDINGS recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case PSK HOLDINGS has ₩111.4b in net cash and a decent-looking balance sheet. And we liked the look of last year's 60% year-on-year EBIT growth. So we don't think PSK HOLDINGS's use of debt is risky. 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. Case in point: We've spotted 4 warning signs for PSK HOLDINGS you should be aware of.

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.