NHN KCP (KOSDAQ:060250) Seems To Use Debt Rather Sparingly

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, NHN KCP Corp. (KOSDAQ:060250) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 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 Debt?

As you can see below, NHN KCP had ₩15.0b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩205.7b in cash to offset that, meaning it has ₩190.7b net cash.

How Healthy Is NHN KCP's Balance Sheet?

We can see from the most recent balance sheet that NHN KCP had liabilities of ₩215.8b falling due within a year, and liabilities of ₩4.74b due beyond that. On the other hand, it had cash of ₩205.7b and ₩34.0b worth of receivables due within a year. So it can boast ₩19.2b more liquid assets than total liabilities.

This state of affairs indicates that NHN KCP's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩1.17t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that NHN KCP has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that NHN KCP has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NHN KCP can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, NHN KCP actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case NHN KCP has ₩190.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩55b, being 161% 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 - NHN KCP has 1 warning sign we think 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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