These 4 Measures Indicate That KHVATECLtd (KOSDAQ:060720) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 KHVATEC Co.,Ltd. (KOSDAQ:060720) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for KHVATECLtd

What Is KHVATECLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KHVATECLtd had ₩46.5b of debt in September 2024, down from ₩53.0b, one year before. However, it does have ₩54.7b in cash offsetting this, leading to net cash of ₩8.22b.

How Healthy Is KHVATECLtd's Balance Sheet?

We can see from the most recent balance sheet that KHVATECLtd had liabilities of ₩104.9b falling due within a year, and liabilities of ₩1.73b due beyond that. Offsetting this, it had ₩54.7b in cash and ₩31.6b in receivables that were due within 12 months. So its liabilities total ₩20.3b more than the combination of its cash and short-term receivables.

Given KHVATECLtd has a market capitalization of ₩204.3b, 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. While it does have liabilities worth noting, KHVATECLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact KHVATECLtd's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if KHVATECLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. KHVATECLtd 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, KHVATECLtd 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 it is always sensible to look at a company's total liabilities, it is very reassuring that KHVATECLtd has ₩8.22b in net cash. So although we see some areas for improvement, we're not too worried about KHVATECLtd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for KHVATECLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.