Is Metalabs (KRX:090370) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Metalabs Co., Ltd. (KRX:090370) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Metalabs's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Metalabs had ₩41.0b of debt, an increase on ₩30.8b, over one year. However, because it has a cash reserve of ₩1.70b, its net debt is less, at about ₩39.3b.

A Look At Metalabs' Liabilities

Zooming in on the latest balance sheet data, we can see that Metalabs had liabilities of ₩35.6b due within 12 months and liabilities of ₩18.2b due beyond that. Offsetting these obligations, it had cash of ₩1.70b as well as receivables valued at ₩4.80b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩47.3b.

Given this deficit is actually higher than the company's market capitalization of ₩32.7b, we think shareholders really should watch Metalabs's debt levels, like a parent watching their child ride a bike for the first time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Metalabs's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

View our latest analysis for Metalabs

In the last year Metalabs wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to ₩38b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Metalabs managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable ₩4.2b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₩4.6b over the last twelve months. So suffice it to say 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. We've identified 3 warning signs with Metalabs (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.