ILSEUNG (KOSDAQ:333430) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ILSEUNG Co., Ltd. (KOSDAQ:333430) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is ILSEUNG's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ILSEUNG had debt of ₩28.2b, up from ₩25.1b in one year. However, it does have ₩28.5b in cash offsetting this, leading to net cash of ₩313.3m.

A Look At ILSEUNG's Liabilities

The latest balance sheet data shows that ILSEUNG had liabilities of ₩11.8b due within a year, and liabilities of ₩27.1b falling due after that. Offsetting these obligations, it had cash of ₩28.5b as well as receivables valued at ₩8.86b due within 12 months. So it has liabilities totalling ₩1.52b more than its cash and near-term receivables, combined.

Having regard to ILSEUNG's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩135.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, ILSEUNG boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for ILSEUNG

Even more impressive was the fact that ILSEUNG grew its EBIT by 318% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ILSEUNG's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ILSEUNG 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. Over the last three years, ILSEUNG saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about ILSEUNG's liabilities, but we can be reassured by the fact it has has net cash of ₩313.3m. And it impressed us with its EBIT growth of 318% over the last year. So we are not troubled with ILSEUNG's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with ILSEUNG .

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.

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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.