Is Lunit (KOSDAQ:328130) A Risky Investment?

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 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 can see that Lunit Inc. (KOSDAQ:328130) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is Lunit's Debt?

As you can see below, at the end of December 2024, Lunit had ₩54.7b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩66.3b in cash, leading to a ₩11.6b net cash position.

How Healthy Is Lunit's Balance Sheet?

According to the last reported balance sheet, Lunit had liabilities of ₩252.4b due within 12 months, and liabilities of ₩17.8b due beyond 12 months. Offsetting this, it had ₩66.3b in cash and ₩19.6b in receivables that were due within 12 months. So it has liabilities totalling ₩184.2b more than its cash and near-term receivables, combined.

Since publicly traded Lunit shares are worth a total of ₩1.43t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Lunit also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lunit's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Lunit

In the last year Lunit wasn't profitable at an EBIT level, but managed to grow its revenue by 116%, to ₩54b. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Lunit?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Lunit had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩72b and booked a ₩82b accounting loss. Given it only has net cash of ₩11.6b, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Lunit has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. 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 instance, we've identified 2 warning signs for Lunit that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.