Is Park Systems (KOSDAQ:140860) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Park Systems Corp. (KOSDAQ:140860) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Park Systems

What Is Park Systems's Debt?

As you can see below, at the end of March 2024, Park Systems had ₩21.6b of debt, up from ₩11.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩77.3b in cash, so it actually has ₩55.6b net cash.

How Strong Is Park Systems' Balance Sheet?

The latest balance sheet data shows that Park Systems had liabilities of ₩56.3b due within a year, and liabilities of ₩8.06b falling due after that. Offsetting this, it had ₩77.3b in cash and ₩23.6b in receivables that were due within 12 months. So it can boast ₩36.5b more liquid assets than total liabilities.

This surplus suggests that Park Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Park Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Park Systems if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Park Systems 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Park Systems 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 most recent three years, Park Systems recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Park Systems has ₩55.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩12b, being 76% of its EBIT. So we are not troubled with Park Systems's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Park Systems's earnings per share history for free.

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. 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.