These 4 Measures Indicate That KoMiCo (KOSDAQ:183300) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that KoMiCo Ltd. (KOSDAQ:183300) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for KoMiCo

What Is KoMiCo's Net Debt?

The image below, which you can click on for greater detail, shows that KoMiCo had debt of ₩16.7b at the end of September 2020, a reduction from ₩92.0b over a year. However, its balance sheet shows it holds ₩95.0b in cash, so it actually has ₩78.4b net cash.

How Strong Is KoMiCo's Balance Sheet?

The latest balance sheet data shows that KoMiCo had liabilities of ₩80.0b due within a year, and liabilities of ₩89.8b falling due after that. Offsetting these obligations, it had cash of ₩95.0b as well as receivables valued at ₩27.0b due within 12 months. So it has liabilities totalling ₩47.8b more than its cash and near-term receivables, combined.

Since publicly traded KoMiCo shares are worth a total of ₩537.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, KoMiCo also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that KoMiCo saw its EBIT decline by 8.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 KoMiCo'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. KoMiCo 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 last three years, KoMiCo saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about KoMiCo's liabilities, but we can be reassured by the fact it has has net cash of ₩78.4b. So while KoMiCo does not have a great balance sheet, it's certainly not too bad. 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 KoMiCo 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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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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