ICD (KOSDAQ:040910) Could Easily Take On More Debt

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. As with many other companies ICD Co., Ltd. (KOSDAQ:040910) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 ICD

What Is ICD's Debt?

As you can see below, ICD had ₩17.8b of debt at September 2020, down from ₩29.1b a year prior. However, it does have ₩34.8b in cash offsetting this, leading to net cash of ₩16.9b.

How Healthy Is ICD's Balance Sheet?

We can see from the most recent balance sheet that ICD had liabilities of ₩52.6b falling due within a year, and liabilities of ₩10.7b due beyond that. Offsetting these obligations, it had cash of ₩34.8b as well as receivables valued at ₩60.9b due within 12 months. So it can boast ₩32.5b more liquid assets than total liabilities.

This short term liquidity is a sign that ICD could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ICD boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, ICD grew its EBIT by 242% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ICD's ability to maintain a healthy balance sheet going forward. 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. ICD 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. In the last three years, ICD's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ICD has net cash of ₩16.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 242% year-on-year EBIT growth. So is ICD's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for ICD (1 is significant!) that you should be aware of before investing here.

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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