Is Incon (KOSDAQ:083640) A Risky Investment?

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 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 Incon Co., Ltd. (KOSDAQ:083640) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Incon

How Much Debt Does Incon Carry?

The image below, which you can click on for greater detail, shows that Incon had debt of ₩11.1b at the end of December 2020, a reduction from ₩20.6b over a year. But it also has ₩45.9b in cash to offset that, meaning it has ₩34.8b net cash.

A Look At Incon's Liabilities

We can see from the most recent balance sheet that Incon had liabilities of ₩26.2b falling due within a year, and liabilities of ₩266.4m due beyond that. Offsetting this, it had ₩45.9b in cash and ₩8.86b in receivables that were due within 12 months. So it actually has ₩28.2b more liquid assets than total liabilities.

This luscious liquidity implies that Incon's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Incon has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Incon made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩1.9b in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Incon's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Incon has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Incon actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Incon has net cash of ₩34.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩2.2b, being 116% of its EBIT. So is Incon'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Incon (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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