Is Polaris Office (KOSDAQ:041020) 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.' 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. Importantly, Polaris Office Corp. (KOSDAQ:041020) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Polaris Office

What Is Polaris Office's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Polaris Office had debt of ₩22.3b, up from ₩13.4b in one year. But it also has ₩159.3b in cash to offset that, meaning it has ₩137.1b net cash.

How Healthy Is Polaris Office's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polaris Office had liabilities of ₩72.2b due within 12 months and liabilities of ₩13.9b due beyond that. Offsetting this, it had ₩159.3b in cash and ₩55.4b in receivables that were due within 12 months. So it actually has ₩128.6b more liquid assets than total liabilities.

This surplus strongly suggests that Polaris Office has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Polaris Office boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Polaris Office has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Polaris Office'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Polaris Office 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. Looking at the most recent three years, Polaris Office recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Polaris Office has ₩137.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 79% year-on-year EBIT growth. So we don't think Polaris Office's use of debt is risky. 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. Be aware that Polaris Office is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.