Daebo MagneticLtd (KOSDAQ:290670) 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.' 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, Daebo Magnetic Co.,Ltd. (KOSDAQ:290670) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Daebo MagneticLtd

How Much Debt Does Daebo MagneticLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Daebo MagneticLtd had ₩4.00b of debt in June 2024, down from ₩5.20b, one year before. However, its balance sheet shows it holds ₩7.86b in cash, so it actually has ₩3.86b net cash.

How Healthy Is Daebo MagneticLtd's Balance Sheet?

The latest balance sheet data shows that Daebo MagneticLtd had liabilities of ₩24.0b due within a year, and liabilities of ₩1.99b falling due after that. Offsetting this, it had ₩7.86b in cash and ₩3.14b in receivables that were due within 12 months. So it has liabilities totalling ₩15.0b more than its cash and near-term receivables, combined.

Of course, Daebo MagneticLtd has a market capitalization of ₩132.2b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Daebo MagneticLtd boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Daebo MagneticLtd 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.

Over 12 months, Daebo MagneticLtd made a loss at the EBIT level, and saw its revenue drop to ₩33b, which is a fall of 60%. To be frank that doesn't bode well.

So How Risky Is Daebo MagneticLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Daebo MagneticLtd 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 ₩12b and booked a ₩9.2b accounting loss. Given it only has net cash of ₩3.86b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 1 warning sign for Daebo MagneticLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.