Is Linkgenesis (KOSDAQ:219420) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Linkgenesis Co., Ltd. (KOSDAQ:219420) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Linkgenesis

What Is Linkgenesis's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Linkgenesis had debt of ₩4.07b, up from ₩197.9m in one year. However, its balance sheet shows it holds ₩33.7b in cash, so it actually has ₩29.6b net cash.

How Healthy Is Linkgenesis's Balance Sheet?

The latest balance sheet data shows that Linkgenesis had liabilities of ₩7.99b due within a year, and liabilities of ₩129.9m falling due after that. Offsetting this, it had ₩33.7b in cash and ₩1.93b in receivables that were due within 12 months. So it can boast ₩27.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Linkgenesis's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Linkgenesis boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Linkgenesis grew its EBIT by 229% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Linkgenesis'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. Linkgenesis 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 most recent three years, Linkgenesis recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Linkgenesis has net cash of ₩29.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 229% year-on-year EBIT growth. At the end of the day we're not concerned about Linkgenesis's debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Linkgenesis (1 is significant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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