Interflex (KOSDAQ:051370) Is Making Moderate Use Of 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Interflex Co., Ltd. (KOSDAQ:051370) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Interflex

How Much Debt Does Interflex Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Interflex had ₩50.0b of debt, an increase on ₩36.8b, over one year. However, it also had ₩47.6b in cash, and so its net debt is ₩2.42b.

How Strong Is Interflex's Balance Sheet?

The latest balance sheet data shows that Interflex had liabilities of ₩149.6b due within a year, and liabilities of ₩8.31b falling due after that. On the other hand, it had cash of ₩47.6b and ₩75.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩34.9b.

Since publicly traded Interflex shares are worth a total of ₩401.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Interflex has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Interflex had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩330b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Interflex's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩32b 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 ₩6.8b of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Interflex that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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