Is Ko Ja (Cayman) (TPE:5215) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ko Ja (Cayman) Co., Ltd. (TPE:5215) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Ko Ja (Cayman)

How Much Debt Does Ko Ja (Cayman) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ko Ja (Cayman) had NT$174.7m of debt, an increase on NT$25.0m, over one year. However, its balance sheet shows it holds NT$976.6m in cash, so it actually has NT$801.8m net cash.

A Look At Ko Ja (Cayman)'s Liabilities

We can see from the most recent balance sheet that Ko Ja (Cayman) had liabilities of NT$1.00b falling due within a year, and liabilities of NT$179.2m due beyond that. Offsetting these obligations, it had cash of NT$976.6m as well as receivables valued at NT$1.58b due within 12 months. So it can boast NT$1.37b more liquid assets than total liabilities.

It's good to see that Ko Ja (Cayman) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Ko Ja (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Ko Ja (Cayman) grew its EBIT by 203% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ko Ja (Cayman)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ko Ja (Cayman) 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. In the last three years, Ko Ja (Cayman)'s free cash flow amounted to 21% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Ko Ja (Cayman) has NT$801.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 203% year-on-year EBIT growth. So is Ko Ja (Cayman)'s debt a risk? It doesn't seem so to us. 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. Be aware that Ko Ja (Cayman) is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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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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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