Korea Circuit (KRX:007810) Has A Rock Solid Balance Sheet

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 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 Korea Circuit Co., Ltd. (KRX:007810) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Korea Circuit

What Is Korea Circuit's Net Debt?

As you can see below, at the end of September 2020, Korea Circuit had ₩90.0b of debt, up from none a year ago. Click the image for more detail. However, it does have ₩174.4b in cash offsetting this, leading to net cash of ₩84.4b.

How Healthy Is Korea Circuit's Balance Sheet?

The latest balance sheet data shows that Korea Circuit had liabilities of ₩269.7b due within a year, and liabilities of ₩28.4b falling due after that. On the other hand, it had cash of ₩174.4b and ₩183.6b worth of receivables due within a year. So it can boast ₩59.9b more liquid assets than total liabilities.

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

Even more impressive was the fact that Korea Circuit grew its EBIT by 478% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Korea Circuit can strengthen its balance sheet over time. 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. While Korea Circuit 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. Happily for any shareholders, Korea Circuit actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Korea Circuit has ₩84.4b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in ₩11b. So is Korea Circuit's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Korea Circuit that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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