Does RingNet (KOSDAQ:042500) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 RingNet Co., Ltd. (KOSDAQ:042500) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for RingNet

How Much Debt Does RingNet Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 RingNet had ₩6.73b of debt, an increase on ₩613.0m, over one year. But on the other hand it also has ₩72.7b in cash, leading to a ₩66.0b net cash position.

A Look At RingNet's Liabilities

The latest balance sheet data shows that RingNet had liabilities of ₩53.9b due within a year, and liabilities of ₩546.2m falling due after that. Offsetting these obligations, it had cash of ₩72.7b as well as receivables valued at ₩28.7b due within 12 months. So it can boast ₩46.9b more liquid assets than total liabilities.

This surplus liquidity suggests that RingNet's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that RingNet has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, RingNet grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. 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 RingNet will need earnings to service that debt. 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. RingNet 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. Happily for any shareholders, RingNet actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case RingNet has ₩66.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩21b, being 157% of its EBIT. So we don't think RingNet's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with RingNet .

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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