These 4 Measures Indicate That TES (KOSDAQ:095610) Is Using Debt Safely

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.' 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. We can see that TES Co., Ltd (KOSDAQ:095610) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TES

What Is TES's Net Debt?

As you can see below, TES had ₩10.0b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩97.7b in cash, so it actually has ₩87.7b net cash.

A Look At TES' Liabilities

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. Offsetting this, it had ₩97.7b in cash and ₩17.5b in receivables that were due within 12 months. So it actually has ₩71.9b more liquid assets than total liabilities.

This surplus suggests that TES has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TES has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that TES grew its EBIT by 174% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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. TES 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. Over the most recent three years, TES recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case TES has ₩87.7b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 174% over the last year. So is TES's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign 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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