Here’s why Mando (KRX: 204320) has a heavy debt burden

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Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Mando Corporation (KRX: 204320) uses the debt. But should shareholders be concerned about its use of debt?

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for Mando

What is Mando’s net debt?

The graph below, which you can click for more details, shows that Mando had 1.74 tonnes of debt in September 2020; about the same as the year before. On the other hand, it has 509.9 billion yen in cash, resulting in net debt of around 1.23 tons of yen.

KOSE: A204320 History of debt to equity March 10, 2021

A look at Mando’s responsibilities

According to the latest published balance sheet, Mando had debts of 1.90 tonnes due within 12 months and debts of 1.28 tonnes due beyond 12 months. On the other hand, he had cash of 509.9 billion yen and receivables worth 1.30 yen within a year. It therefore has liabilities totaling 1.37 tonnes more than its cash and short-term receivables combined.

Mando has a market cap of 2.84t, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

While we’re not worried about Mando’s 3.3 net debt to EBITDA ratio, we do think its ultra-low 1.7x interest coverage is a sign of high leverage. This is in large part due to the company’s significant depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of profit, and its debt may be heavier than it appears. At first glance. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. Worse yet, Mando has seen its EBIT reach 63% over the past 12 months. If the income continues like this for the long term, there is an incredible chance to pay off that debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Mando can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business can only repay its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Mando has created free cash flow of 19% of its EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.

Our point of view

To be frank, Mando’s interest coverage and his track record of (not) growing his EBIT make us rather uncomfortable with his debt levels. But at least his total liability level isn’t that bad. Overall, it seems to us that Mando’s balance sheet is really very risky for the company. For this reason, we are quite cautious on the stock, and we believe that shareholders should closely monitor its liquidity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for Mando (1 is a bit nasty!) Which you should be aware of before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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