Is Mobile Appliance (KOSDAQ:087260) 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.' 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. Importantly, Mobile Appliance, Inc. (KOSDAQ:087260) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mobile Appliance

What Is Mobile Appliance's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Mobile Appliance had ₩14.5b of debt, an increase on ₩12.7b, over one year. But on the other hand it also has ₩37.6b in cash, leading to a ₩23.2b net cash position.

A Look At Mobile Appliance's Liabilities

Zooming in on the latest balance sheet data, we can see that Mobile Appliance had liabilities of ₩32.1b due within 12 months and liabilities of ₩895.5m due beyond that. On the other hand, it had cash of ₩37.6b and ₩7.50b worth of receivables due within a year. So it actually has ₩12.1b more liquid assets than total liabilities.

This excess liquidity suggests that Mobile Appliance is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Mobile Appliance has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Mobile Appliance made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩334m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mobile Appliance'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mobile Appliance 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. Happily for any shareholders, Mobile Appliance actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Mobile Appliance has net cash of ₩23.2b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩6.3b, being 1,902% of its EBIT. So we don't think Mobile Appliance's use of debt is 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. We've identified 3 warning signs with Mobile Appliance , and understanding them should be part of your investment process.

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.

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