Narae Nanotech (KOSDAQ:137080) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Narae Nanotech Corporation (KOSDAQ:137080) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Narae Nanotech

How Much Debt Does Narae Nanotech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Narae Nanotech had ₩59.9b of debt, an increase on ₩47.2b, over one year. However, it also had ₩6.42b in cash, and so its net debt is ₩53.5b.

How Strong Is Narae Nanotech's Balance Sheet?

The latest balance sheet data shows that Narae Nanotech had liabilities of ₩62.4b due within a year, and liabilities of ₩10.9b falling due after that. Offsetting this, it had ₩6.42b in cash and ₩7.53b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩59.4b.

This deficit is considerable relative to its market capitalization of ₩76.5b, so it does suggest shareholders should keep an eye on Narae Nanotech'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 it is Narae Nanotech'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, Narae Nanotech made a loss at the EBIT level, and saw its revenue drop to ₩72b, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

While Narae Nanotech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩5.3b. 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 ₩33b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Narae Nanotech (of which 3 are potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.