Mgen Solutions (KOSDAQ:032790) Has Debt But No Earnings; Should You Worry?

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 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, Mgen Solutions Co., Ltd. (KOSDAQ:032790) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Mgen Solutions

What Is Mgen Solutions's Debt?

As you can see below, at the end of March 2024, Mgen Solutions had ₩11.6b of debt, up from none a year ago. Click the image for more detail. However, it does have ₩13.4b in cash offsetting this, leading to net cash of ₩1.73b.

A Look At Mgen Solutions' Liabilities

We can see from the most recent balance sheet that Mgen Solutions had liabilities of ₩31.9b falling due within a year, and liabilities of ₩4.62b due beyond that. Offsetting this, it had ₩13.4b in cash and ₩20.3b in receivables that were due within 12 months. So its liabilities total ₩2.88b more than the combination of its cash and short-term receivables.

Of course, Mgen Solutions has a market capitalization of ₩70.4b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Mgen Solutions 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 Mgen Solutions 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.

In the last year Mgen Solutions had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₩88b. That makes us nervous, to say the least.

So How Risky Is Mgen Solutions?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Mgen Solutions lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩19b of cash and made a loss of ₩22b. Given it only has net cash of ₩1.73b, 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. Be aware that Mgen Solutions is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.