Is Ko Ja (Cayman) (TPE:5215) 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.' 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 note that Ko Ja (Cayman) Co., Ltd. (TPE:5215) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ko Ja (Cayman)

What Is Ko Ja (Cayman)'s Net Debt?

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. But on the other hand it also has NT$976.6m in cash, leading to a NT$801.8m net cash position.

How Healthy Is Ko Ja (Cayman)'s Balance Sheet?

According to the last reported balance sheet, Ko Ja (Cayman) had liabilities of NT$1.00b due within 12 months, and liabilities of NT$179.2m due beyond 12 months. On the other hand, it had cash of NT$976.6m and NT$1.58b worth of receivables due within a year. So it actually has NT$1.37b more liquid assets than total liabilities.

This surplus suggests that Ko Ja (Cayman) 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. Succinctly put, Ko Ja (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Ko Ja (Cayman) grew its EBIT by 203% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Ko Ja (Cayman)'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Ko Ja (Cayman) (1 is potentially serious) you should be aware of.

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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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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