Eyesvision (KOSDAQ:031310) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Eyesvision Corp. (KOSDAQ:031310) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Eyesvision

What Is Eyesvision's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Eyesvision had ₩27.7b of debt, an increase on ₩15.7b, over one year. However, it does have ₩89.6b in cash offsetting this, leading to net cash of ₩61.8b.

A Look At Eyesvision's Liabilities

We can see from the most recent balance sheet that Eyesvision had liabilities of ₩44.5b falling due within a year, and liabilities of ₩19.3b due beyond that. Offsetting these obligations, it had cash of ₩89.6b as well as receivables valued at ₩34.3b due within 12 months. So it actually has ₩60.1b more liquid assets than total liabilities.

This luscious liquidity implies that Eyesvision's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Eyesvision has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Eyesvision turned things around in the last 12 months, delivering and EBIT of ₩5.9b. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Eyesvision will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Eyesvision 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. Looking at the most recent year, Eyesvision recorded free cash flow of 28% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Eyesvision has ₩61.8b in net cash and a decent-looking balance sheet. So we don't think Eyesvision's use of debt is risky. 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 example - Eyesvision has 2 warning signs we think you should be aware of.

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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