Does Ko Ja (Cayman) (TWSE:5215) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ko Ja (Cayman) Co., Ltd. (TWSE:5215) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ko Ja (Cayman)

How Much Debt Does Ko Ja (Cayman) Carry?

As you can see below, Ko Ja (Cayman) had NT$195.1m of debt at March 2024, down from NT$210.4m a year prior. However, it does have NT$1.52b in cash offsetting this, leading to net cash of NT$1.33b.

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

The latest balance sheet data shows that Ko Ja (Cayman) had liabilities of NT$901.8m due within a year, and liabilities of NT$229.9m falling due after that. Offsetting these obligations, it had cash of NT$1.52b as well as receivables valued at NT$1.01b due within 12 months. So it can boast NT$1.41b more liquid assets than total liabilities.

This excess liquidity is a great indication that Ko Ja (Cayman)'s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Ko Ja (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Ko Ja (Cayman) grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ko Ja (Cayman) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Ko Ja (Cayman) recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ko Ja (Cayman) has NT$1.33b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in NT$72m. At the end of the day we're not concerned about Ko Ja (Cayman)'s debt. 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. Be aware that Ko Ja (Cayman) is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.