Is NHN KCP (KOSDAQ:060250) 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.' 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 NHN KCP Corp. (KOSDAQ:060250) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NHN KCP

What Is NHN KCP's Net Debt?

As you can see below, NHN KCP had ₩15.0b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩166.2b in cash to offset that, meaning it has ₩151.2b net cash.

How Strong Is NHN KCP's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NHN KCP had liabilities of ₩200.2b due within 12 months and liabilities of ₩5.55b due beyond that. Offsetting this, it had ₩166.2b in cash and ₩34.3b in receivables that were due within 12 months. So its liabilities total ₩5.21b more than the combination of its cash and short-term receivables.

Having regard to NHN KCP's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩1.38t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, NHN KCP also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that NHN KCP has boosted its EBIT by 38%, 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 future earnings, more than anything, that will determine NHN KCP's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NHN KCP 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, NHN KCP generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about NHN KCP's liabilities, but we can be reassured by the fact it has has net cash of ₩151.2b. And it impressed us with free cash flow of ₩35b, being 94% of its EBIT. So we don't think NHN KCP's use of debt is risky. 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 example, we've discovered 1 warning sign for NHN KCP that you should be aware of before investing here.

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.

If you decide to trade NHN KCP, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.