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

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 Intops Co., Ltd. (KOSDAQ:049070) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Intops

What Is Intops's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Intops had ₩34.3b of debt, an increase on ₩32.9b, over one year. But it also has ₩252.6b in cash to offset that, meaning it has ₩218.3b net cash.

A Look At Intops' Liabilities

The latest balance sheet data shows that Intops had liabilities of ₩134.4b due within a year, and liabilities of ₩17.4b falling due after that. Offsetting this, it had ₩252.6b in cash and ₩88.4b in receivables that were due within 12 months. So it can boast ₩189.2b more liquid assets than total liabilities.

This excess liquidity is a great indication that Intops' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Intops boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Intops's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intops can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Intops 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 three years, Intops generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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 is Intops's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Intops that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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