INTEKPLUS (KOSDAQ:064290) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, INTEKPLUS Co., Ltd. (KOSDAQ:064290) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for INTEKPLUS

What Is INTEKPLUS's Debt?

As you can see below, at the end of December 2020, INTEKPLUS had ₩9.44b of debt, up from ₩8.39b a year ago. Click the image for more detail. However, it also had ₩8.69b in cash, and so its net debt is ₩746.3m.

A Look At INTEKPLUS' Liabilities

The latest balance sheet data shows that INTEKPLUS had liabilities of ₩19.1b due within a year, and liabilities of ₩2.82b falling due after that. Offsetting these obligations, it had cash of ₩8.69b as well as receivables valued at ₩14.3b due within 12 months. So it can boast ₩1.07b more liquid assets than total liabilities.

Having regard to INTEKPLUS' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩298.8b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, INTEKPLUS has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

INTEKPLUS has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.095 and EBIT of 51.6 times the interest expense. So relative to past earnings, the debt load seems trivial. In addition to that, we're happy to report that INTEKPLUS has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if INTEKPLUS 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last two years, INTEKPLUS actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

INTEKPLUS's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. When we consider the range of factors above, it looks like INTEKPLUS is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with INTEKPLUS (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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