Is ECOCABLtd (KOSDAQ:128540) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies ECOCAB Co.,Ltd (KOSDAQ:128540) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 ECOCABLtd

What Is ECOCABLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that ECOCABLtd had ₩44.3b in debt in September 2024; about the same as the year before. On the flip side, it has ₩17.0b in cash leading to net debt of about ₩27.3b.

How Healthy Is ECOCABLtd's Balance Sheet?

According to the last reported balance sheet, ECOCABLtd had liabilities of ₩65.5b due within 12 months, and liabilities of ₩12.4b due beyond 12 months. Offsetting these obligations, it had cash of ₩17.0b as well as receivables valued at ₩21.5b due within 12 months. So it has liabilities totalling ₩39.3b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩46.0b, so it does suggest shareholders should keep an eye on ECOCABLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ECOCABLtd 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 ECOCABLtd had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩122b. That's not what we would hope to see.

Caveat Emptor

Not only did ECOCABLtd'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 ₩6.2b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩5.7b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for ECOCABLtd (1 can't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.