These 4 Measures Indicate That Neo Cremar (KOSDAQ:311390) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Neo Cremar Co., Ltd. (KOSDAQ:311390) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Neo Cremar

What Is Neo Cremar's Net Debt?

As you can see below, Neo Cremar had ₩5.60b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩12.0b in cash, leading to a ₩6.42b net cash position.

How Strong Is Neo Cremar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Neo Cremar had liabilities of ₩2.22b due within 12 months 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 can boast ₩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 it is Neo Cremar'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last two years, Neo Cremar saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Neo Cremar has net cash of ₩6.42b, as well as more liquid assets than liabilities. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Neo Cremar 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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