Is K.S. Terminals (TPE:3003) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that K.S. Terminals Inc. (TPE:3003) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for K.S. Terminals

What Is K.S. Terminals's Debt?

As you can see below, at the end of September 2020, K.S. Terminals had NT$1.19b of debt, up from NT$1.13b a year ago. Click the image for more detail. But on the other hand it also has NT$2.64b in cash, leading to a NT$1.45b net cash position.

How Healthy Is K.S. Terminals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that K.S. Terminals had liabilities of NT$1.40b due within 12 months and liabilities of NT$430.8m due beyond that. Offsetting these obligations, it had cash of NT$2.64b as well as receivables valued at NT$660.2m due within 12 months. So it can boast NT$1.48b more liquid assets than total liabilities.

This surplus suggests that K.S. Terminals is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that K.S. Terminals has more cash than debt is arguably a good indication that it can manage its debt safely.

While K.S. Terminals doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if K.S. Terminals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. K.S. Terminals 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. Over the most recent three years, K.S. Terminals recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case K.S. Terminals has NT$1.45b in net cash and a decent-looking balance sheet. So we don't think K.S. Terminals's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for K.S. Terminals that you should be aware of before investing here.

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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