KINX (KOSDAQ:093320) Has A Rock Solid Balance Sheet

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 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 can see that KINX, Inc. (KOSDAQ:093320) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for KINX

What Is KINX's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 KINX had debt of ₩8.17b, up from ₩4.08b in one year. However, it does have ₩74.1b in cash offsetting this, leading to net cash of ₩65.9b.

How Strong Is KINX's Balance Sheet?

According to the last reported balance sheet, KINX had liabilities of ₩17.1b due within 12 months, and liabilities of ₩10.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩74.1b as well as receivables valued at ₩10.1b due within 12 months. So it actually has ₩56.8b more liquid assets than total liabilities.

This surplus suggests that KINX has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KINX boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that KINX grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if KINX 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 company can only pay off debt with cold hard cash, not accounting profits. While KINX 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. During the last three years, KINX generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case KINX has ₩65.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩24b, being 92% of its EBIT. So we don't think KINX's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for KINX you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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