PSK HOLDINGS (KOSDAQ:031980) Has Debt But No Earnings; Should You Worry?

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. 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?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 September 2020 PSK HOLDINGS had ₩14.6b of debt, an increase on ₩130.7m, over one year. But it also has ₩66.8b in cash to offset that, meaning it has ₩52.2b net cash.

How Healthy Is PSK HOLDINGS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PSK HOLDINGS had liabilities of ₩21.7b due within 12 months and liabilities of ₩18.0b due beyond that. 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.

This excess liquidity suggests that PSK HOLDINGS is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that PSK HOLDINGS has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PSK HOLDINGS will need earnings to service that debt. 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. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is PSK HOLDINGS?

Although PSK HOLDINGS had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory 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. 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. Case in point: We've spotted 2 warning signs for PSK HOLDINGS you should be aware of, and 1 of them is 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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This article by Simply Wall St is general in nature. 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.
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