Is Korea Information & Communications (KOSDAQ:025770) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Korea Information & Communications Co., Ltd. (KOSDAQ:025770) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Korea Information & Communications

How Much Debt Does Korea Information & Communications Carry?

The chart below, which you can click on for greater detail, shows that Korea Information & Communications had ₩3.08b in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds ₩128.7b in cash, so it actually has ₩125.6b net cash.

How Strong Is Korea Information & Communications' Balance Sheet?

We can see from the most recent balance sheet that Korea Information & Communications had liabilities of ₩106.1b falling due within a year, and liabilities of ₩12.9b due beyond that. Offsetting these obligations, it had cash of ₩128.7b as well as receivables valued at ₩83.3b due within 12 months. So it can boast ₩93.0b more liquid assets than total liabilities.

This surplus suggests that Korea Information & Communications is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Korea Information & Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Korea Information & Communications's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. 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 it is Korea Information & Communications's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Korea Information & Communications 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. During the last three years, Korea Information & Communications produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Korea Information & Communications has net cash of ₩125.6b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩2.4b, being 76% of its EBIT. So we don't think Korea Information & Communications's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Korea Information & Communications (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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