Is DEEPNOID (KOSDAQ:315640) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that DEEPNOID Inc. (KOSDAQ:315640) does use debt in its business. But the real question is whether this debt is making the company risky.

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does DEEPNOID Carry?

As you can see below, at the end of December 2024, DEEPNOID had ₩6.90b of debt, up from ₩736.1m a year ago. Click the image for more detail. But on the other hand it also has ₩12.6b in cash, leading to a ₩5.66b net cash position.

How Strong Is DEEPNOID's Balance Sheet?

According to the last reported balance sheet, DEEPNOID had liabilities of ₩3.21b due within 12 months, and liabilities of ₩9.22b due beyond 12 months. Offsetting these obligations, it had cash of ₩12.6b as well as receivables valued at ₩2.34b due within 12 months. So it actually has ₩2.46b more liquid assets than total liabilities.

This state of affairs indicates that DEEPNOID's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩132.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that DEEPNOID has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DEEPNOID can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

View our latest analysis for DEEPNOID

Over 12 months, DEEPNOID reported revenue of ₩11b, which is a gain of 461%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is DEEPNOID?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months DEEPNOID lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩20b of cash and made a loss of ₩9.1b. With only ₩5.66b on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, DEEPNOID's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example DEEPNOID has 3 warning signs (and 1 which is concerning) we think 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.