KSIGNLtd (KOSDAQ:192250) Could Easily Take On More 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.' 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. As with many other companies KSIGN Co.,Ltd. (KOSDAQ:192250) 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for KSIGNLtd

What Is KSIGNLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KSIGNLtd had ₩5.78b of debt in September 2020, down from ₩6.20b, one year before. However, it does have ₩38.8b in cash offsetting this, leading to net cash of ₩33.0b.

How Healthy Is KSIGNLtd's Balance Sheet?

We can see from the most recent balance sheet that KSIGNLtd had liabilities of ₩9.12b falling due within a year, and liabilities of ₩34.6m due beyond that. Offsetting this, it had ₩38.8b in cash and ₩5.31b in receivables that were due within 12 months. So it actually has ₩34.9b more liquid assets than total liabilities.

This surplus suggests that KSIGNLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, KSIGNLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, KSIGNLtd grew its EBIT by 113% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is KSIGNLtd's earnings that will influence how the balance sheet holds up in the future. 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. KSIGNLtd 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. Over the last two years, KSIGNLtd recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KSIGNLtd has net cash of ₩33.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩4.9b, being 87% of its EBIT. The bottom line is that we do not find KSIGNLtd's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for KSIGNLtd you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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