MFM KOREA (KOSDAQ:323230) Has Debt But No Earnings; Should You Worry?

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 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, MFM KOREA Co., Ltd. (KOSDAQ:323230) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MFM KOREA

What Is MFM KOREA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MFM KOREA had ₩23.2b of debt in March 2024, down from ₩44.6b, one year before. However, because it has a cash reserve of ₩527.3m, its net debt is less, at about ₩22.7b.

How Healthy Is MFM KOREA's Balance Sheet?

We can see from the most recent balance sheet that MFM KOREA had liabilities of ₩54.3b falling due within a year, and liabilities of ₩16.8b due beyond that. On the other hand, it had cash of ₩527.3m and ₩19.1b worth of receivables due within a year. So its liabilities total ₩51.4b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩21.3b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, MFM KOREA would probably need a major re-capitalization if its creditors were to demand repayment. 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 MFM KOREA'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.

Over 12 months, MFM KOREA made a loss at the EBIT level, and saw its revenue drop to ₩103b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While MFM KOREA's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩18b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₩26b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MFM KOREA is showing 3 warning signs in our investment analysis , and 1 of those is a bit 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.