Does Neo Cremar (KOSDAQ:311390) 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. We note that Neo Cremar Co., Ltd. (KOSDAQ:311390) 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Neo Cremar

What Is Neo Cremar's Net Debt?

The chart below, which you can click on for greater detail, shows that Neo Cremar had ₩5.60b in debt in September 2020; about the same as the year before. However, it does have ₩12.0b in cash offsetting this, leading to net cash of ₩6.42b.

A Look At Neo Cremar's Liabilities

We can see from the most recent balance sheet that Neo Cremar had liabilities of ₩2.22b falling due within a year, and liabilities of ₩6.84b due beyond that. On the other hand, it had cash of ₩12.0b and ₩3.94b worth of receivables due within a year. So it actually has ₩6.91b more liquid assets than total liabilities.

This surplus suggests that Neo Cremar has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Neo Cremar boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Neo Cremar grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Neo Cremar will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Neo Cremar 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 two years, Neo Cremar burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Neo Cremar has ₩6.42b in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't have any problem with Neo Cremar's use of debt. 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. For example - Neo Cremar has 3 warning signs we think you should be aware of.

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. 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.
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