Is PSK HOLDINGS (KOSDAQ:031980) Using Debt 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 PSK HOLDINGS Inc. (KOSDAQ:031980) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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

What Is PSK HOLDINGS's Net Debt?

As you can see below, at the end of September 2020, PSK HOLDINGS had ₩14.6b of debt, up from ₩130.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩66.8b in cash, so it actually has ₩52.2b net cash.

How Strong Is PSK HOLDINGS's Balance Sheet?

According to the last reported balance sheet, PSK HOLDINGS had liabilities of ₩21.7b due within 12 months, and liabilities of ₩18.0b due beyond 12 months. On the other hand, it had cash of ₩66.8b and ₩9.16b worth of receivables due within a year. So it can boast ₩36.3b more liquid assets than total liabilities.

It's good to see that PSK HOLDINGS has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, PSK HOLDINGS boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is PSK HOLDINGS'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.

Over 12 months, PSK HOLDINGS reported revenue of ₩47b, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is PSK HOLDINGS?

While PSK HOLDINGS lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩44b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for PSK HOLDINGS you should be aware of, and 2 of them are a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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