Is Coreline Soft (KOSDAQ:384470) 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.' 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. We can see that Coreline Soft Co., Ltd. (KOSDAQ:384470) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Coreline Soft

What Is Coreline Soft's Net Debt?

As you can see below, at the end of June 2024, Coreline Soft had ₩10.0b of debt, up from ₩1.38b a year ago. Click the image for more detail. However, it does have ₩26.0b in cash offsetting this, leading to net cash of ₩16.0b.

How Strong Is Coreline Soft's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Coreline Soft had liabilities of ₩2.56b due within 12 months and liabilities of ₩16.6b due beyond that. Offsetting this, it had ₩26.0b in cash and ₩1.19b in receivables that were due within 12 months. So it can boast ₩7.99b more liquid assets than total liabilities.

This surplus suggests that Coreline Soft has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Coreline Soft has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Coreline Soft'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.

Over 12 months, Coreline Soft reported revenue of ₩4.4b, which is a gain of 8.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Coreline Soft?

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 Coreline Soft lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩11b of cash and made a loss of ₩15b. But at least it has ₩16.0b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Coreline Soft (2 are potentially serious!) that you should be aware of before investing here.

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.