Does TES (KOSDAQ:095610) Have A Healthy Balance Sheet?

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 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. As with many other companies TES Co., Ltd (KOSDAQ:095610) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TES

How Much Debt Does TES Carry?

The image below, which you can click on for greater detail, shows that at September 2020 TES had debt of ₩10.0b, up from none in one year. But on the other hand it also has ₩97.7b in cash, leading to a ₩87.7b net cash position.

How Healthy Is TES's Balance Sheet?

According to the last reported balance sheet, TES had liabilities of ₩38.8b due within 12 months, and liabilities of ₩4.41b due beyond 12 months. On the other hand, it had cash of ₩97.7b and ₩17.5b worth of receivables due within a year. So it can boast ₩71.9b more liquid assets than total liabilities.

This short term liquidity is a sign that TES could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TES has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, TES grew its EBIT by 174% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TES'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TES has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, TES's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that TES has net cash of ₩87.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 174% year-on-year EBIT growth. So we don't think TES's use of debt is risky. 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 2 warning signs for TES that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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