Does TEMC CNS (KOSDAQ:241790) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that TEMC CNS Co., Ltd. (KOSDAQ:241790) does use debt in its business. But is this debt a concern to shareholders?

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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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is TEMC CNS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 TEMC CNS had ₩18.8b of debt, an increase on ₩9.53b, over one year. However, it does have ₩18.2b in cash offsetting this, leading to net debt of about ₩616.4m.

A Look At TEMC CNS' Liabilities

Zooming in on the latest balance sheet data, we can see that TEMC CNS had liabilities of ₩44.0b due within 12 months and liabilities of ₩1.82b due beyond that. On the other hand, it had cash of ₩18.2b and ₩7.52b worth of receivables due within a year. So its liabilities total ₩20.2b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TEMC CNS has a market capitalization of ₩52.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, TEMC CNS has a very light debt load indeed.

See our latest analysis for TEMC CNS

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

TEMC CNS has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.046 and EBIT of 11.9 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. It is just as well that TEMC CNS's load is not too heavy, because its EBIT was down 55% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 TEMC CNS 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, TEMC CNS's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

TEMC CNS's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example its interest cover was refreshing. Looking at all the angles mentioned above, it does seem to us that TEMC CNS is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for TEMC CNS you should be aware of, and 1 of them doesn't sit too well with us.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.