We Think ENERGY&MACHINERY KOREALtd (KOSDAQ:095190) Has A Fair Chunk 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 note that ENERGY&MACHINERY KOREA Co.,Ltd. (KOSDAQ:095190) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ENERGY&MACHINERY KOREALtd

How Much Debt Does ENERGY&MACHINERY KOREALtd Carry?

As you can see below, ENERGY&MACHINERY KOREALtd had ₩56.2b of debt at September 2020, down from ₩84.3b a year prior. On the flip side, it has ₩12.6b in cash leading to net debt of about ₩43.7b.

How Strong Is ENERGY&MACHINERY KOREALtd's Balance Sheet?

We can see from the most recent balance sheet that ENERGY&MACHINERY KOREALtd had liabilities of ₩91.6b falling due within a year, and liabilities of ₩20.7b due beyond that. On the other hand, it had cash of ₩12.6b and ₩20.5b worth of receivables due within a year. So it has liabilities totalling ₩79.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ENERGY&MACHINERY KOREALtd has a market capitalization of ₩242.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is ENERGY&MACHINERY KOREALtd'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, ENERGY&MACHINERY KOREALtd made a loss at the EBIT level, and saw its revenue drop to ₩78b, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

Not only did ENERGY&MACHINERY KOREALtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩9.4b 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 ₩9.5b of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with ENERGY&MACHINERY KOREALtd (including 1 which is potentially serious) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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