These 4 Measures Indicate That LiveplexLtd (KOSDAQ:050120) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Liveplex Co.,Ltd. (KOSDAQ:050120) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LiveplexLtd

What Is LiveplexLtd's Net Debt?

The image below, which you can click on for greater detail, shows that LiveplexLtd had debt of ₩2.93b at the end of September 2020, a reduction from ₩78.6b over a year. But it also has ₩193.2b in cash to offset that, meaning it has ₩190.3b net cash.

How Healthy Is LiveplexLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LiveplexLtd had liabilities of ₩367.2b due within 12 months and liabilities of ₩125.0b due beyond that. Offsetting these obligations, it had cash of ₩193.2b as well as receivables valued at ₩229.7b due within 12 months. So its liabilities total ₩69.3b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩58.7b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. LiveplexLtd boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that LiveplexLtd improved its EBIT from a last year's loss to a positive ₩1.7b. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LiveplexLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While LiveplexLtd 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. Happily for any shareholders, LiveplexLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although LiveplexLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩190.3b. The cherry on top was that in converted 9,190% of that EBIT to free cash flow, bringing in ₩153b. So while LiveplexLtd does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for LiveplexLtd (of which 2 make us uncomfortable!) you should know about.

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. 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.
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