Here's Why Kona ILtd (KOSDAQ:052400) Has A Meaningful Debt Burden

Warren Buffett famously said, '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. As with many other companies Kona I Co.,Ltd. (KOSDAQ:052400) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kona ILtd

How Much Debt Does Kona ILtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Kona ILtd had debt of ₩41.5b, up from ₩37.5b in one year. But on the other hand it also has ₩150.9b in cash, leading to a ₩109.3b net cash position.

How Strong Is Kona ILtd's Balance Sheet?

We can see from the most recent balance sheet that Kona ILtd had liabilities of ₩213.9b falling due within a year, and liabilities of ₩4.70b due beyond that. On the other hand, it had cash of ₩150.9b and ₩22.6b worth of receivables due within a year. So its liabilities total ₩45.1b more than the combination of its cash and short-term receivables.

Of course, Kona ILtd has a market capitalization of ₩354.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Kona ILtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Kona ILtd's load is not too heavy, because its EBIT was down 28% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kona ILtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kona ILtd 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, Kona ILtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Kona ILtd does have more liabilities than liquid assets, it also has net cash of ₩109.3b. So although we see some areas for improvement, we're not too worried about Kona ILtd's balance sheet. 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 Kona ILtd has 2 warning signs (and 1 which is concerning) we think you should know about.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.