KidariStudio (KRX:020120) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, KidariStudio, Inc. (KRX:020120) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for KidariStudio

How Much Debt Does KidariStudio Carry?

The image below, which you can click on for greater detail, shows that KidariStudio had debt of ₩7.83b at the end of September 2020, a reduction from ₩14.2b over a year. But it also has ₩10.3b in cash to offset that, meaning it has ₩2.49b net cash.

How Strong Is KidariStudio's Balance Sheet?

According to the last reported balance sheet, KidariStudio had liabilities of ₩10.5b due within 12 months, and liabilities of ₩8.39b due beyond 12 months. Offsetting this, it had ₩10.3b in cash and ₩2.45b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩6.18b.

This state of affairs indicates that KidariStudio's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩392.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, KidariStudio boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that KidariStudio grew its EBIT by 543% over twelve months. That boost will make it even easier to pay down debt going forward. 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 KidariStudio'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. KidariStudio 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 three years, KidariStudio barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that KidariStudio has ₩2.49b in net cash. And we liked the look of last year's 543% year-on-year EBIT growth. So we are not troubled with KidariStudio's debt use. 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. We've identified 3 warning signs with KidariStudio (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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