Is Castec KoreaLtd (KOSDAQ:071850) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Castec Korea Co.,Ltd (KOSDAQ:071850) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Castec KoreaLtd

What Is Castec KoreaLtd's Debt?

As you can see below, Castec KoreaLtd had ₩75.5b of debt at June 2024, down from ₩82.6b a year prior. However, it does have ₩16.3b in cash offsetting this, leading to net debt of about ₩59.2b.

A Look At Castec KoreaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Castec KoreaLtd had liabilities of ₩105.1b due within 12 months and liabilities of ₩41.9b due beyond that. Offsetting this, it had ₩16.3b in cash and ₩29.3b in receivables that were due within 12 months. So it has liabilities totalling ₩101.4b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩46.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Castec KoreaLtd would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Castec KoreaLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Castec KoreaLtd had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩162b. We would much prefer see growth.

Caveat Emptor

Not only did Castec KoreaLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩8.2b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩14b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Castec KoreaLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.