We Think Kmw (KOSDAQ:032500) Can Stay On Top Of Its 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. We can see that Kmw Inc. (KOSDAQ:032500) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kmw

What Is Kmw's Net Debt?

As you can see below, Kmw had ₩73.5b of debt at December 2020, down from ₩93.8b a year prior. But it also has ₩130.2b in cash to offset that, meaning it has ₩56.8b net cash.

How Strong Is Kmw's Balance Sheet?

The latest balance sheet data shows that Kmw had liabilities of ₩109.6b due within a year, and liabilities of ₩34.2b falling due after that. On the other hand, it had cash of ₩130.2b and ₩78.2b worth of receivables due within a year. So it can boast ₩64.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Kmw could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kmw has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Kmw if management cannot prevent a repeat of the 76% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kmw can strengthen its balance sheet over time. 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. While Kmw 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. In the last two years, Kmw's free cash flow amounted to 43% of its EBIT, less 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 Kmw has ₩56.8b in net cash and a decent-looking balance sheet. So we are not troubled with Kmw's debt use. 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, we've discovered 2 warning signs for Kmw that you should be aware of before investing here.

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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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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