Is ISC (KOSDAQ:095340) A Risky Investment?

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.' 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. As with many other companies ISC Co., Ltd. (KOSDAQ:095340) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for ISC

What Is ISC's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ISC had debt of ₩38.2b, up from ₩14.3b in one year. However, it does have ₩49.5b in cash offsetting this, leading to net cash of ₩11.3b.

A Look At ISC's Liabilities

Zooming in on the latest balance sheet data, we can see that ISC had liabilities of ₩34.8b due within 12 months and liabilities of ₩34.9b due beyond that. Offsetting these obligations, it had cash of ₩49.5b as well as receivables valued at ₩25.1b due within 12 months. So it can boast ₩4.83b more liquid assets than total liabilities.

Having regard to ISC's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩351.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ISC boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that ISC grew its EBIT by 8,894% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ISC will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. ISC 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. Looking at the most recent three years, ISC recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case ISC has ₩11.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 8,894% over the last year. So is ISC'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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with ISC (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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