We Think Total Soft Bank (KOSDAQ:045340) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Total Soft Bank Ltd. (KOSDAQ:045340) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Total Soft Bank

How Much Debt Does Total Soft Bank Carry?

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.

How Strong Is Total Soft Bank's Balance Sheet?

We can see from the most recent balance sheet that Total Soft Bank had liabilities of ₩5.22b falling due within a year, and liabilities of ₩5.94b due beyond that. Offsetting these obligations, it had cash of ₩8.92b as well as receivables valued at ₩4.54b due within 12 months. So it can boast ₩2.30b more liquid assets than total liabilities.

Having regard to Total Soft Bank's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩148.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Total Soft Bank has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Total Soft Bank grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Total Soft Bank 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Total Soft Bank 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. 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 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 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Total Soft Bank that 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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