We Think Korea Information Engineering Services (KOSDAQ:039740) Has A Fair Chunk Of 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 can see that Korea Information Engineering Services Co., Ltd. (KOSDAQ:039740) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Korea Information Engineering Services

How Much Debt Does Korea Information Engineering Services Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Korea Information Engineering Services had ₩11.0b of debt, an increase on ₩8.67b, over one year. However, it does have ₩9.34b in cash offsetting this, leading to net debt of about ₩1.64b.

How Strong Is Korea Information Engineering Services's Balance Sheet?

We can see from the most recent balance sheet that Korea Information Engineering Services had liabilities of ₩45.9b falling due within a year, and liabilities of ₩5.70b due beyond that. Offsetting this, it had ₩9.34b in cash and ₩29.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.2b.

This deficit isn't so bad because Korea Information Engineering Services is worth ₩25.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Korea Information Engineering Services's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Korea Information Engineering Services had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to ₩169b. We would much prefer see growth.

Caveat Emptor

Importantly, Korea Information Engineering Services had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.7b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩506m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Korea Information Engineering Services (including 1 which is makes us a bit uncomfortable) .

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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