These 4 Measures Indicate That IDIS Holdings (KOSDAQ:054800) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that IDIS Holdings Co., Ltd. (KOSDAQ:054800) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IDIS Holdings

How Much Debt Does IDIS Holdings Carry?

The chart below, which you can click on for greater detail, shows that IDIS Holdings had ₩100.7b in debt in September 2020; about the same as the year before. However, it does have ₩292.4b in cash offsetting this, leading to net cash of ₩191.7b.

A Look At IDIS Holdings' Liabilities

According to the last reported balance sheet, IDIS Holdings had liabilities of ₩75.4b due within 12 months, and liabilities of ₩91.4b due beyond 12 months. On the other hand, it had cash of ₩292.4b and ₩81.8b worth of receivables due within a year. So it can boast ₩207.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that IDIS Holdings' 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. Simply put, the fact that IDIS Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that IDIS Holdings's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is IDIS Holdings's earnings that will influence how the balance sheet holds up in the future. 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. IDIS Holdings 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, IDIS Holdings produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that IDIS Holdings has net cash of ₩191.7b and plenty of liquid assets. And it impressed us with free cash flow of ₩37b, being 79% of its EBIT. So is IDIS Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that IDIS Holdings is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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This article by Simply Wall St is general in nature. 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.
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