Essen Tech (KOSDAQ:043340) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Essen Tech Co., Ltd. (KOSDAQ:043340) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Essen Tech

How Much Debt Does Essen Tech Carry?

As you can see below, Essen Tech had ₩45.5b of debt at March 2024, down from ₩49.6b a year prior. However, it does have ₩11.1b in cash offsetting this, leading to net debt of about ₩34.4b.

A Look At Essen Tech's Liabilities

The latest balance sheet data shows that Essen Tech had liabilities of ₩31.2b due within a year, and liabilities of ₩20.8b falling due after that. Offsetting this, it had ₩11.1b in cash and ₩11.7b in receivables that were due within 12 months. So its liabilities total ₩29.2b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩47.7b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Essen Tech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Essen Tech made a loss at the EBIT level, and saw its revenue drop to ₩47b, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

While Essen Tech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩6.3b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩5.1b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Essen Tech has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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