Does Brand XLtd (KOSDAQ:337930) Have A Healthy Balance Sheet?

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, Brand X Co.,Ltd. (KOSDAQ:337930) does carry debt. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about Brand XLtd. View them for free.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Brand XLtd Carry?

As you can see below, at the end of December 2024, Brand XLtd had ₩18.0b of debt, up from ₩160.1m a year ago. Click the image for more detail. But on the other hand it also has ₩63.0b in cash, leading to a ₩44.9b net cash position.

A Look At Brand XLtd's Liabilities

The latest balance sheet data shows that Brand XLtd had liabilities of ₩34.3b due within a year, and liabilities of ₩23.9b falling due after that. Offsetting this, it had ₩63.0b in cash and ₩10.3b in receivables that were due within 12 months. So it can boast ₩15.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Brand XLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Brand XLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Brand XLtd

On top of that, Brand XLtd grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Brand XLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Brand XLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Brand XLtd produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Brand XLtd has net cash of ₩44.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we don't think Brand XLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Brand XLtd is showing 1 warning sign in our investment analysis , you should know about...

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.