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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Creative & Innovative System Corporation (KOSDAQ:222080) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Creative & Innovative System

What Is Creative & Innovative System's Net Debt?

As you can see below, Creative & Innovative System had ₩8.71b of debt at September 2024, down from ₩44.3b a year prior. However, its balance sheet shows it holds ₩34.5b in cash, so it actually has ₩25.8b net cash.

A Look At Creative & Innovative System's Liabilities

According to the last reported balance sheet, Creative & Innovative System had liabilities of ₩213.7b due within 12 months, and liabilities of ₩49.1b due beyond 12 months. Offsetting these obligations, it had cash of ₩34.5b as well as receivables valued at ₩46.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩181.5b.

This deficit isn't so bad because Creative & Innovative System is worth ₩573.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Creative & Innovative System also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Creative & Innovative System grew its EBIT by 612% 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 ultimately the future profitability of the business will decide if Creative & Innovative System can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 ₩25.8b. And we liked the look of last year's 612% year-on-year EBIT growth. So we don't have any problem with Creative & Innovative System's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Creative & Innovative System you should know about.

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.