RSUPPORT (KOSDAQ:131370) Seems To Use Debt Quite Sensibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, RSUPPORT Co., Ltd. (KOSDAQ:131370) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RSUPPORT

How Much Debt Does RSUPPORT Carry?

As you can see below, RSUPPORT had ₩9.00b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩32.9b in cash, leading to a ₩23.9b net cash position.

A Look At RSUPPORT's Liabilities

We can see from the most recent balance sheet that RSUPPORT had liabilities of ₩18.6b falling due within a year, and liabilities of ₩1.47b due beyond that. Offsetting these obligations, it had cash of ₩32.9b as well as receivables valued at ₩5.87b due within 12 months. So it actually has ₩18.7b more liquid assets than total liabilities.

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

Even more impressive was the fact that RSUPPORT grew its EBIT by 142% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if RSUPPORT 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. RSUPPORT 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. Looking at the most recent three years, RSUPPORT recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RSUPPORT has net cash of ₩23.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 142% over the last year. So is RSUPPORT'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. Be aware that RSUPPORT 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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