Is MEKICS (KOSDAQ:058110) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, MEKICS CO., Ltd (KOSDAQ:058110) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, 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.

See our latest analysis for MEKICS

What Is MEKICS's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 MEKICS had debt of ₩16.6b, up from ₩12.1b in one year. However, it does have ₩10.5b in cash offsetting this, leading to net debt of about ₩6.12b.

How Healthy Is MEKICS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MEKICS had liabilities of ₩14.4b due within 12 months and liabilities of ₩5.96b due beyond that. On the other hand, it had cash of ₩10.5b and ₩1.44b worth of receivables due within a year. So its liabilities total ₩8.50b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because MEKICS is worth ₩35.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MEKICS 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 MEKICS had a loss before interest and tax, and actually shrunk its revenue by 4.5%, to ₩11b. That's not what we would hope to see.

Caveat Emptor

Importantly, MEKICS had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩9.4b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩6.4b of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for MEKICS (of which 1 is significant!) you should know about.

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.