Is Creative & Innovative System (KOSDAQ:222080) Using Too Much Debt?

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.' 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. Importantly, Creative & Innovative System Corporation (KOSDAQ:222080) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Creative & Innovative System

What Is Creative & Innovative System's Debt?

As you can see below, Creative & Innovative System had ₩8.53b of debt at June 2024, down from ₩45.0b a year prior. But it also has ₩73.3b in cash to offset that, meaning it has ₩64.8b net cash.

How Strong Is Creative & Innovative System's Balance Sheet?

According to the last reported balance sheet, Creative & Innovative System had liabilities of ₩309.8b due within 12 months, and liabilities of ₩5.10b due beyond 12 months. Offsetting this, it had ₩73.3b in cash and ₩58.9b in receivables that were due within 12 months. So it has liabilities totalling ₩182.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Creative & Innovative System has a market capitalization of ₩713.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Creative & Innovative System boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Creative & Innovative System grew its EBIT by 7,609% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Creative & Innovative System's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Creative & Innovative System has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Creative & Innovative System burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Creative & Innovative System does have more liabilities than liquid assets, it also has net cash of ₩64.8b. And we liked the look of last year's 7,609% year-on-year EBIT growth. So we are not troubled with Creative & Innovative System's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Creative & Innovative System (2 are concerning!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.