Is Kino (GTSM:4154) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kino Co., Ltd. (GTSM:4154) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kino

What Is Kino's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Kino had NT$78.4m of debt, an increase on NT$46.5m, over one year. However, it does have NT$195.5m in cash offsetting this, leading to net cash of NT$117.1m.

How Healthy Is Kino's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kino had liabilities of NT$232.0m due within 12 months and liabilities of NT$27.1m due beyond that. On the other hand, it had cash of NT$195.5m and NT$172.8m worth of receivables due within a year. So it can boast NT$109.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Kino could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kino has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kino'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, Kino saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Kino?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Kino had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$36m of cash and made a loss of NT$21m. Given it only has net cash of NT$117.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 3 warning signs with Kino (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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