Is Nsys (KOSDAQ:333620) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Nsys Co., Ltd. (KOSDAQ:333620) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nsys

What Is Nsys's Net Debt?

The image below, which you can click on for greater detail, shows that Nsys had debt of ₩7.39b at the end of September 2024, a reduction from ₩10.6b over a year. But on the other hand it also has ₩25.9b in cash, leading to a ₩18.5b net cash position.

How Healthy Is Nsys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nsys had liabilities of ₩35.9b due within 12 months and liabilities of ₩1.10b due beyond that. Offsetting these obligations, it had cash of ₩25.9b as well as receivables valued at ₩19.3b due within 12 months. So it actually has ₩8.16b more liquid assets than total liabilities.

This surplus suggests that Nsys has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nsys boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Nsys grew its EBIT by 327% last year, which is an impressive improvement. 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 Nsys'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. Nsys may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Nsys produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nsys has net cash of ₩18.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 327% over the last year. So we don't think Nsys's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Nsys you should be aware of.

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.