We Think Korea Information Engineering Services (KOSDAQ:039740) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Korea Information Engineering Services Co., Ltd. (KOSDAQ:039740) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Korea Information Engineering Services

How Much Debt Does Korea Information Engineering Services Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Korea Information Engineering Services had debt of ₩11.5b, up from ₩8.98b in one year. On the flip side, it has ₩7.37b in cash leading to net debt of about ₩4.16b.

A Look At Korea Information Engineering Services' Liabilities

Zooming in on the latest balance sheet data, we can see that Korea Information Engineering Services had liabilities of ₩29.2b due within 12 months and liabilities of ₩5.26b due beyond that. Offsetting these obligations, it had cash of ₩7.37b as well as receivables valued at ₩22.7b due within 12 months. So its liabilities total ₩4.38b more than the combination of its cash and short-term receivables.

Of course, Korea Information Engineering Services has a market capitalization of ₩29.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Korea Information Engineering Services 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.

In the last year Korea Information Engineering Services wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to ₩169b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Korea Information Engineering Services had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.8b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩559m of cash over the last year. So to be blunt we think it is 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. Be aware that Korea Information Engineering Services is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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