Is Kinko Optical (TPE:6209) 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 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. We can see that Kinko Optical Co., Ltd. (TPE:6209) does use debt in its business. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kinko Optical

How Much Debt Does Kinko Optical Carry?

As you can see below, at the end of September 2020, Kinko Optical had NT$662.7m of debt, up from NT$494.1m a year ago. Click the image for more detail. But it also has NT$738.0m in cash to offset that, meaning it has NT$75.3m net cash.

A Look At Kinko Optical's Liabilities

According to the last reported balance sheet, Kinko Optical had liabilities of NT$1.16b due within 12 months, and liabilities of NT$310.9m due beyond 12 months. On the other hand, it had cash of NT$738.0m and NT$874.8m worth of receivables due within a year. So it actually has NT$136.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Kinko Optical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kinko Optical boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kinko Optical'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.

In the last year Kinko Optical had a loss before interest and tax, and actually shrunk its revenue by 13%, to NT$2.9b. We would much prefer see growth.

So How Risky Is Kinko Optical?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Kinko Optical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through NT$298m of cash and made a loss of NT$137m. Given it only has net cash of NT$75.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Kinko Optical that you should be aware of.

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.

If you decide to trade Kinko Optical, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.