Modetour Network (KOSDAQ:080160) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Modetour Network Inc. (KOSDAQ:080160) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Modetour Network

What Is Modetour Network's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Modetour Network had debt of ₩80.3b, up from ₩71.9b in one year. On the flip side, it has ₩77.0b in cash leading to net debt of about ₩3.27b.

A Look At Modetour Network's Liabilities

Zooming in on the latest balance sheet data, we can see that Modetour Network had liabilities of ₩46.1b due within 12 months and liabilities of ₩134.5b due beyond that. Offsetting these obligations, it had cash of ₩77.0b as well as receivables valued at ₩4.88b due within 12 months. So its liabilities total ₩98.7b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Modetour Network is worth ₩392.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. But either way, Modetour Network has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Modetour Network'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.

In the last year Modetour Network had a loss before interest and tax, and actually shrunk its revenue by 62%, to ₩116b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Modetour Network's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩22b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩58b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 Modetour Network is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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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