Here's Why K-Auction.Co.Ltd (KOSDAQ:102370) Can Afford Some Debt

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 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. As with many other companies K-Auction.Co.Ltd. (KOSDAQ:102370) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for K-Auction.Co.Ltd

What Is K-Auction.Co.Ltd's Net Debt?

The chart below, which you can click on for greater detail, shows that K-Auction.Co.Ltd had ₩75.2b in debt in June 2024; about the same as the year before. On the flip side, it has ₩20.2b in cash leading to net debt of about ₩55.0b.

How Healthy Is K-Auction.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that K-Auction.Co.Ltd had liabilities of ₩52.1b due within 12 months and liabilities of ₩35.8b due beyond that. Offsetting these obligations, it had cash of ₩20.2b as well as receivables valued at ₩2.56b due within 12 months. So its liabilities total ₩65.1b more than the combination of its cash and short-term receivables.

K-Auction.Co.Ltd has a market capitalization of ₩110.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since K-Auction.Co.Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, K-Auction.Co.Ltd made a loss at the EBIT level, and saw its revenue drop to ₩14b, which is a fall of 3.9%. We would much prefer see growth.

Caveat Emptor

Importantly, K-Auction.Co.Ltd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩5.8b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩11b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for K-Auction.Co.Ltd you should be aware of, and 3 of them are a bit concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.