Is Maniker.Co.Ltd (KRX:027740) Using Too Much 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 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. Importantly, Maniker.Co.,Ltd (KRX:027740) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Maniker.Co.Ltd

What Is Maniker.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Maniker.Co.Ltd had ₩92.9b of debt, an increase on ₩81.9b, over one year. However, it also had ₩31.9b in cash, and so its net debt is ₩60.9b.

How Healthy Is Maniker.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maniker.Co.Ltd had liabilities of ₩107.7b due within 12 months and liabilities of ₩25.2b due beyond that. On the other hand, it had cash of ₩31.9b and ₩17.2b worth of receivables due within a year. So its liabilities total ₩83.8b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩135.6b, so it does suggest shareholders should keep an eye on Maniker.Co.Ltd's use of debt. 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 you can't view debt in total isolation; since Maniker.Co.Ltd 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.

In the last year Maniker.Co.Ltd had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩215b. We would much prefer see growth.

Caveat Emptor

Not only did Maniker.Co.Ltd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩38b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩17b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Maniker.Co.Ltd is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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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