K-Auction.Co.Ltd (KOSDAQ:102370) Is Making Moderate Use Of Debt

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 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. We note that K-Auction.Co.Ltd. (KOSDAQ:102370) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for K-Auction.Co.Ltd

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

As you can see below, K-Auction.Co.Ltd had ₩74.6b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩22.0b in cash, and so its net debt is ₩52.6b.

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

According to the last reported balance sheet, K-Auction.Co.Ltd had liabilities of ₩13.1b due within 12 months, and liabilities of ₩75.4b due beyond 12 months. On the other hand, it had cash of ₩22.0b and ₩2.29b worth of receivables due within a year. So it has liabilities totalling ₩64.2b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩99.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is K-Auction.Co.Ltd'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.

Over 12 months, K-Auction.Co.Ltd made a loss at the EBIT level, and saw its revenue drop to ₩13b, which is a fall of 32%. That makes us nervous, to say the least.

Caveat Emptor

While K-Auction.Co.Ltd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩5.6b at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩9.9b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for K-Auction.Co.Ltd (2 are potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com