Is NEOOTO (KOSDAQ:212560) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies NEOOTO CO., Ltd (KOSDAQ:212560) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is NEOOTO's Debt?

As you can see below, at the end of December 2024, NEOOTO had ₩30.6b of debt, up from ₩25.5b a year ago. Click the image for more detail. But it also has ₩76.5b in cash to offset that, meaning it has ₩45.9b net cash.

A Look At NEOOTO's Liabilities

The latest balance sheet data shows that NEOOTO had liabilities of ₩86.5b due within a year, and liabilities of ₩6.47b falling due after that. On the other hand, it had cash of ₩76.5b and ₩37.0b worth of receivables due within a year. So it actually has ₩20.6b more liquid assets than total liabilities.

This excess liquidity suggests that NEOOTO is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, NEOOTO boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for NEOOTO

Also positive, NEOOTO grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since NEOOTO 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NEOOTO has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, NEOOTO actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case NEOOTO has ₩45.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in ₩21b. The bottom line is that we do not find NEOOTO's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NEOOTO is showing 1 warning sign in our investment analysis , you should know about...

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.