Is Contec.Co.Ltd (KOSDAQ:451760) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Contec.,Co.Ltd (KOSDAQ:451760) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

Check out our latest analysis for Contec.Co.Ltd

How Much Debt Does Contec.Co.Ltd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Contec.Co.Ltd had debt of ₩21.1b, up from ₩2.73b in one year. But it also has ₩104.2b in cash to offset that, meaning it has ₩83.1b net cash.

How Healthy Is Contec.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Contec.Co.Ltd had liabilities of ₩70.1b due within 12 months, and liabilities of ₩5.41b due beyond 12 months. Offsetting this, it had ₩104.2b in cash and ₩12.4b in receivables that were due within 12 months. So it can boast ₩41.1b more liquid assets than total liabilities.

This surplus suggests that Contec.Co.Ltd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Contec.Co.Ltd 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 it is future earnings, more than anything, that will determine Contec.Co.Ltd'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.

Over 12 months, Contec.Co.Ltd reported revenue of ₩41b, which is a gain of 264%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Contec.Co.Ltd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Contec.Co.Ltd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩23b of cash and made a loss of ₩19b. While this does make the company a bit risky, it's important to remember it has net cash of ₩83.1b. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Contec.Co.Ltd's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Case in point: We've spotted 1 warning sign for Contec.Co.Ltd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.