Eyesvision (KOSDAQ:031310) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, Eyesvision Corp. (KOSDAQ:031310) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Eyesvision

What Is Eyesvision's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Eyesvision had debt of ₩23.5b, up from ₩4.03b in one year. However, its balance sheet shows it holds ₩104.7b in cash, so it actually has ₩81.2b net cash.

How Strong Is Eyesvision's Balance Sheet?

We can see from the most recent balance sheet that Eyesvision had liabilities of ₩18.3b falling due within a year, and liabilities of ₩39.2b due beyond that. On the other hand, it had cash of ₩104.7b and ₩20.7b worth of receivables due within a year. So it actually has ₩67.9b more liquid assets than total liabilities.

This luscious liquidity implies that Eyesvision's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Eyesvision boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Eyesvision's load is not too heavy, because its EBIT was down 68% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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. 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. Happily for any shareholders, Eyesvision actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Eyesvision has ₩81.2b in net cash and a strong balance sheet. And it impressed us with free cash flow of ₩6.6b, being 136% of its EBIT. So we don't think Eyesvision's use of debt is risky. 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. For example, we've discovered 2 warning signs for Eyesvision that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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