Eco&Dream (KOSDAQ:101360) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Eco&Dream Co., Ltd. (KOSDAQ:101360) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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 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 Eco&Dream

What Is Eco&Dream's Debt?

As you can see below, at the end of September 2024, Eco&Dream had ₩126.4b of debt, up from ₩38.1b a year ago. Click the image for more detail. However, it does have ₩39.2b in cash offsetting this, leading to net debt of about ₩87.1b.

A Look At Eco&Dream's Liabilities

Zooming in on the latest balance sheet data, we can see that Eco&Dream had liabilities of ₩85.1b due within 12 months and liabilities of ₩80.7b due beyond that. On the other hand, it had cash of ₩39.2b and ₩9.80b worth of receivables due within a year. So it has liabilities totalling ₩116.8b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Eco&Dream has a market capitalization of ₩429.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Eco&Dream's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Eco&Dream wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to ₩83b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Eco&Dream still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.5b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩193b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example, we've discovered 3 warning signs for Eco&Dream (2 are potentially serious!) that you should be aware of before investing here.

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.