These 4 Measures Indicate That Intops (KOSDAQ:049070) Is Using Debt Safely

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 Intops Co., Ltd. (KOSDAQ:049070) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Intops

How Much Debt Does Intops Carry?

As you can see below, at the end of September 2020, Intops had ₩34.3b of debt, up from ₩32.9b a year ago. Click the image for more detail. However, it does have ₩252.6b in cash offsetting this, leading to net cash of ₩218.3b.

How Strong Is Intops's Balance Sheet?

According to the last reported balance sheet, Intops had liabilities of ₩134.4b due within 12 months, and liabilities of ₩17.4b due beyond 12 months. Offsetting this, it had ₩252.6b in cash and ₩88.4b in receivables that were due within 12 months. So it actually has ₩189.2b more liquid assets than total liabilities.

This surplus strongly suggests that Intops has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Intops has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Intops has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Intops's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Intops may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Intops generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Intops has ₩218.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩32b, being 96% of its EBIT. So we don't think Intops's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Intops that you should be aware of before investing here.

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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