ZinitixLtd (KOSDAQ:303030) Has A Pretty Healthy Balance Sheet

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.' 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 can see that Zinitix Co.,Ltd (KOSDAQ:303030) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ZinitixLtd

How Much Debt Does ZinitixLtd Carry?

The image below, which you can click on for greater detail, shows that ZinitixLtd had debt of ₩4.50b at the end of December 2020, a reduction from ₩5.09b over a year. However, its balance sheet shows it holds ₩19.1b in cash, so it actually has ₩14.6b net cash.

A Look At ZinitixLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that ZinitixLtd had liabilities of ₩9.64b due within 12 months and liabilities of ₩1.82b due beyond that. Offsetting these obligations, it had cash of ₩19.1b as well as receivables valued at ₩4.13b due within 12 months. So it can boast ₩11.8b more liquid assets than total liabilities.

This short term liquidity is a sign that ZinitixLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ZinitixLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that ZinitixLtd's load is not too heavy, because its EBIT was down 71% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is ZinitixLtd's earnings that will influence how the balance sheet holds up in the future. 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. While ZinitixLtd 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. Looking at the most recent two years, ZinitixLtd recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ZinitixLtd has net cash of ₩14.6b, as well as more liquid assets than liabilities. So we are not troubled with ZinitixLtd's debt use. 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 instance, we've identified 2 warning signs for ZinitixLtd (1 is a bit unpleasant) you should be aware of.

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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