Does Korea Electric Power Industrial Development (KRX:130660) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Korea Electric Power Industrial Development Co., Ltd (KRX:130660) does carry debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Korea Electric Power Industrial Development

What Is Korea Electric Power Industrial Development's Net Debt?

As you can see below, at the end of September 2020, Korea Electric Power Industrial Development had ₩10.4b of debt, up from ₩6.64b a year ago. Click the image for more detail. However, it does have ₩32.4b in cash offsetting this, leading to net cash of ₩22.0b.

How Strong Is Korea Electric Power Industrial Development's Balance Sheet?

The latest balance sheet data shows that Korea Electric Power Industrial Development had liabilities of ₩47.7b due within a year, and liabilities of ₩34.1b falling due after that. Offsetting these obligations, it had cash of ₩32.4b as well as receivables valued at ₩59.6b due within 12 months. So it actually has ₩10.2b more liquid assets than total liabilities.

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

But the other side of the story is that Korea Electric Power Industrial Development saw its EBIT decline by 4.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Korea Electric Power Industrial Development's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Korea Electric Power Industrial Development 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. During the last three years, Korea Electric Power Industrial Development produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. 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 Korea Electric Power Industrial Development has ₩22.0b in net cash and a decent-looking balance sheet. So we don't think Korea Electric Power Industrial Development'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. To that end, you should learn about the 3 warning signs we've spotted with Korea Electric Power Industrial Development (including 2 which is shouldn't be ignored) .

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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