Is Total Soft Bank (KOSDAQ:045340) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Total Soft Bank Ltd. (KOSDAQ:045340) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Total Soft Bank

What Is Total Soft Bank's Net Debt?

As you can see below, Total Soft Bank had ₩2.70b of debt at September 2020, down from ₩3.50b a year prior. However, its balance sheet shows it holds ₩8.92b in cash, so it actually has ₩6.22b net cash.

A Look At Total Soft Bank's Liabilities

The latest balance sheet data shows that Total Soft Bank had liabilities of ₩5.22b due within a year, and liabilities of ₩5.94b falling due after that. Offsetting these obligations, it had cash of ₩8.92b as well as receivables valued at ₩4.54b due within 12 months. So it actually has ₩2.30b more liquid assets than total liabilities.

This surplus suggests that Total Soft Bank has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Total Soft Bank boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Total Soft Bank grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Total Soft Bank'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 company can only pay off debt with cold hard cash, not accounting profits. While Total Soft Bank 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, Total Soft Bank produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Total Soft Bank has net cash of ₩6.22b, as well as more liquid assets than liabilities. So is Total Soft Bank's debt a risk? It doesn't seem so to us. 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. Be aware that Total Soft Bank is showing 1 warning sign in our investment analysis , you should know about...

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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