We Think Park Systems (KOSDAQ:140860) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Park Systems Corp. (KOSDAQ:140860) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Park Systems's Debt?

As you can see below, at the end of December 2024, Park Systems had ₩37.4b of debt, up from ₩22.7b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩94.0b in cash, so it actually has ₩56.6b net cash.

A Look At Park Systems' Liabilities

According to the last reported balance sheet, Park Systems had liabilities of ₩62.9b due within 12 months, and liabilities of ₩23.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩94.0b as well as receivables valued at ₩47.5b due within 12 months. So it can boast ₩55.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Park Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Park Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Park Systems

In addition to that, we're happy to report that Park Systems has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Park Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Park Systems 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. Looking at the most recent three years, Park Systems recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Park Systems has net cash of ₩56.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Park Systems's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Park Systems you should know about.

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. 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.