KNR System (KOSDAQ:199430) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies KNR System Inc. (KOSDAQ:199430) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 KNR System

What Is KNR System's Net Debt?

The image below, which you can click on for greater detail, shows that KNR System had debt of ₩11.9b at the end of June 2024, a reduction from ₩16.1b over a year. But it also has ₩17.9b in cash to offset that, meaning it has ₩6.01b net cash.

How Healthy Is KNR System's Balance Sheet?

We can see from the most recent balance sheet that KNR System had liabilities of ₩13.8b falling due within a year, and liabilities of ₩5.69b due beyond that. On the other hand, it had cash of ₩17.9b and ₩5.54b worth of receivables due within a year. So it can boast ₩3.97b more liquid assets than total liabilities.

This surplus suggests that KNR System has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KNR System boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KNR System will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, KNR System made a loss at the EBIT level, and saw its revenue drop to ₩24b, which is a fall of 24%. That makes us nervous, to say the least.

So How Risky Is KNR System?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that KNR System had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩9.3b and booked a ₩5.1b accounting loss. However, it has net cash of ₩6.01b, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with KNR System (at least 1 which is significant) , and understanding them should be part of your investment process.

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.