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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PSK HOLDINGS Inc. (KOSDAQ:031980) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PSK HOLDINGS

What Is PSK HOLDINGS's Net Debt?

As you can see below, at the end of June 2024, PSK HOLDINGS had ₩16.0b of debt, up from ₩14.5b a year ago. Click the image for more detail. But on the other hand it also has ₩129.8b in cash, leading to a ₩113.8b net cash position.

How Strong Is PSK HOLDINGS' Balance Sheet?

According to the last reported balance sheet, PSK HOLDINGS had liabilities of ₩45.6b due within 12 months, and liabilities of ₩28.0b due beyond 12 months. On the other hand, it had cash of ₩129.8b and ₩17.1b worth of receivables due within a year. So it can boast ₩73.2b 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 88% 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 ultimately the future profitability of the business will decide if PSK HOLDINGS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PSK HOLDINGS has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, PSK HOLDINGS produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. 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 ₩113.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 88% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with PSK HOLDINGS , and understanding them should be part of your investment process.

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.