Korea Airport ServiceLtd (KRX:005430) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Korea Airport Service Co.,Ltd. (KRX:005430) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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

View our latest analysis for Korea Airport ServiceLtd

What Is Korea Airport ServiceLtd's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Korea Airport ServiceLtd had debt of ₩30.0b, up from none in one year. However, its balance sheet shows it holds ₩132.7b in cash, so it actually has ₩102.7b net cash.

How Healthy Is Korea Airport ServiceLtd's Balance Sheet?

We can see from the most recent balance sheet that Korea Airport ServiceLtd had liabilities of ₩84.3b falling due within a year, and liabilities of ₩68.5b due beyond that. Offsetting this, it had ₩132.7b in cash and ₩48.1b in receivables that were due within 12 months. So it actually has ₩28.0b more liquid assets than total liabilities.

This surplus suggests that Korea Airport ServiceLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Korea Airport ServiceLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Korea Airport ServiceLtd'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.

Over 12 months, Korea Airport ServiceLtd made a loss at the EBIT level, and saw its revenue drop to ₩299b, which is a fall of 41%. That makes us nervous, to say the least.

So How Risky Is Korea Airport ServiceLtd?

Although Korea Airport ServiceLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩15b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Korea Airport ServiceLtd (of which 1 doesn't sit too well with us!) 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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