We Think Kisan Telecom (KOSDAQ:035460) Can Stay On Top Of Its 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 Kisan Telecom Co., Ltd. (KOSDAQ:035460) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kisan Telecom

How Much Debt Does Kisan Telecom Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Kisan Telecom had ₩17.0b of debt, an increase on ₩13.2b, over one year. On the flip side, it has ₩16.9b in cash leading to net debt of about ₩89.5m.

A Look At Kisan Telecom's Liabilities

The latest balance sheet data shows that Kisan Telecom had liabilities of ₩29.9b due within a year, and liabilities of ₩12.5b falling due after that. Offsetting these obligations, it had cash of ₩16.9b as well as receivables valued at ₩12.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.0b.

Kisan Telecom has a market capitalization of ₩37.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Carrying virtually no net debt, Kisan Telecom has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt at just 0.018 times EBITDA, it seems Kisan Telecom only uses a little bit of leverage. But EBIT was only 6.2 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. It was also good to see that despite losing money on the EBIT line last year, Kisan Telecom turned things around in the last 12 months, delivering and EBIT of ₩3.4b. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kisan Telecom'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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Kisan Telecom actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Kisan Telecom's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its net debt to EBITDA also supports that impression! When we consider the range of factors above, it looks like Kisan Telecom is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Kisan Telecom , and understanding them should be part of your investment process.

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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