Here's Why Interflex (KOSDAQ:051370) Can Afford Some Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Interflex Co., Ltd. (KOSDAQ:051370) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Interflex

What Is Interflex's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Interflex had debt of ₩50.0b, up from ₩36.8b in one year. However, it does have ₩47.6b in cash offsetting this, leading to net debt of about ₩2.42b.

How Strong Is Interflex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Interflex had liabilities of ₩149.6b due within 12 months and liabilities of ₩8.31b due beyond that. Offsetting these obligations, it had cash of ₩47.6b as well as receivables valued at ₩75.4b due within 12 months. So it has liabilities totalling ₩34.9b more than its cash and near-term receivables, combined.

Given Interflex has a market capitalization of ₩286.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Interflex has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Interflex'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.

In the last year Interflex had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩330b. That makes us nervous, to say the least.

Caveat Emptor

While Interflex's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩32b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩6.8b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Interflex that you should be aware of before investing here.

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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