Is Kinko Optical (TWSE:6209) 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 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 note that Kinko Optical Co., Ltd. (TWSE:6209) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kinko Optical

How Much Debt Does Kinko Optical Carry?

The image below, which you can click on for greater detail, shows that Kinko Optical had debt of NT$341.6m at the end of September 2024, a reduction from NT$593.4m over a year. But it also has NT$851.0m in cash to offset that, meaning it has NT$509.4m net cash.

How Healthy Is Kinko Optical's Balance Sheet?

We can see from the most recent balance sheet that Kinko Optical had liabilities of NT$782.5m falling due within a year, and liabilities of NT$43.3m due beyond that. Offsetting these obligations, it had cash of NT$851.0m as well as receivables valued at NT$578.3m due within 12 months. So it actually has NT$603.6m more liquid assets than total liabilities.

This surplus suggests that Kinko Optical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Kinko Optical 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 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.

Over 12 months, Kinko Optical made a loss at the EBIT level, and saw its revenue drop to NT$2.3b, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is Kinko Optical?

Although Kinko Optical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$224m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Kinko Optical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.