We Think Kisan Telecom (KOSDAQ:035460) Can Stay On Top Of Its Debt

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.' 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 note that Kisan Telecom Co., Ltd (KOSDAQ:035460) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kisan Telecom

What Is Kisan Telecom's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kisan Telecom had ₩17.1b of debt, an increase on ₩16.1b, over one year. But it also has ₩20.1b in cash to offset that, meaning it has ₩3.05b net cash.

How Healthy Is Kisan Telecom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kisan Telecom had liabilities of ₩25.5b due within 12 months and liabilities of ₩10.3b due beyond that. Offsetting these obligations, it had cash of ₩20.1b as well as receivables valued at ₩13.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩1.80b.

Given Kisan Telecom has a market capitalization of ₩41.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kisan Telecom also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Kisan Telecom's EBIT was down 89% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kisan Telecom 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kisan Telecom 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. During the last two years, Kisan Telecom produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Kisan Telecom's liabilities, but we can be reassured by the fact it has has net cash of ₩3.05b. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in ₩1.8b. So we don't have any problem with Kisan Telecom's use of debt. 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 Kisan Telecom has 4 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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