Posco Future M (KRX:003670) Is Making Moderate Use Of Debt

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 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 Posco Future M Co., Ltd. (KRX:003670) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Posco Future M

How Much Debt Does Posco Future M Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Posco Future M had debt of ₩3.79t, up from ₩2.88t in one year. However, it does have ₩798.3b in cash offsetting this, leading to net debt of about ₩2.99t.

How Strong Is Posco Future M's Balance Sheet?

The latest balance sheet data shows that Posco Future M had liabilities of ₩2.23t due within a year, and liabilities of ₩2.85t falling due after that. Offsetting these obligations, it had cash of ₩798.3b as well as receivables valued at ₩586.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.69t.

While this might seem like a lot, it is not so bad since Posco Future M has a market capitalization of ₩12t, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Posco Future M's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Posco Future M had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to ₩4.1t. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Posco Future M produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩32b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩1.3t of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Posco Future M you should know about.

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.