Nuon (KOSDAQ:123840) 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. Importantly, Nuon Co., Ltd. (KOSDAQ:123840) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Nuon

How Much Debt Does Nuon Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Nuon had ₩33.5b of debt, an increase on ₩17.7b, over one year. However, because it has a cash reserve of ₩4.07b, its net debt is less, at about ₩29.4b.

A Look At Nuon's Liabilities

Zooming in on the latest balance sheet data, we can see that Nuon had liabilities of ₩40.7b due within 12 months and liabilities of ₩5.44b due beyond that. On the other hand, it had cash of ₩4.07b and ₩1.86b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩40.2b.

This deficit is considerable relative to its market capitalization of ₩56.1b, so it does suggest shareholders should keep an eye on Nuon's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Nuon 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 Nuon wasn't profitable at an EBIT level, but managed to grow its revenue by 161%, to ₩13b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Nuon managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₩10b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₩5.8b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example Nuon has 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.