Is ECOCABLtd (KOSDAQ:128540) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ECOCAB Co.,Ltd (KOSDAQ:128540) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ECOCABLtd

What Is ECOCABLtd's Net Debt?

As you can see below, ECOCABLtd had ₩42.4b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩21.1b in cash offsetting this, leading to net debt of about ₩21.3b.

A Look At ECOCABLtd's Liabilities

We can see from the most recent balance sheet that ECOCABLtd had liabilities of ₩65.7b falling due within a year, and liabilities of ₩6.43b due beyond that. On the other hand, it had cash of ₩21.1b and ₩25.0b worth of receivables due within a year. So it has liabilities totalling ₩26.1b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩33.5b, 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. There's no doubt that we learn most about debt from the balance sheet. 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 12%, to ₩126b. That's not what we would hope to see.

Caveat Emptor

While ECOCABLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩4.7b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ECOCABLtd is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.