Is Medience (KOSDAQ:014100) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Medience Co., Ltd. (KOSDAQ:014100) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Medience

How Much Debt Does Medience Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Medience had ₩14.6b of debt, an increase on ₩12.9b, over one year. However, it also had ₩1.75b in cash, and so its net debt is ₩12.9b.

How Healthy Is Medience's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Medience had liabilities of ₩22.8b due within 12 months and liabilities of ₩12.5b due beyond that. On the other hand, it had cash of ₩1.75b and ₩9.99b worth of receivables due within a year. So it has liabilities totalling ₩23.5b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩26.5b, so it does suggest shareholders should keep an eye on Medience'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 Medience 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 Medience had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to ₩65b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Medience produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩2.0b at the EBIT level. 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. Another cause for caution is that is bled ₩4.1b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Medience (of which 1 is potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com