Is Leaders Cosmetics (KOSDAQ:016100) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Leaders Cosmetics Co., Ltd. (KOSDAQ:016100) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Leaders Cosmetics

What Is Leaders Cosmetics's Net Debt?

The image below, which you can click on for greater detail, shows that Leaders Cosmetics had debt of ₩25.0b at the end of June 2024, a reduction from ₩27.0b over a year. However, it also had ₩13.2b in cash, and so its net debt is ₩11.8b.

A Look At Leaders Cosmetics' Liabilities

Zooming in on the latest balance sheet data, we can see that Leaders Cosmetics had liabilities of ₩33.9b due within 12 months and liabilities of ₩2.25b due beyond that. Offsetting these obligations, it had cash of ₩13.2b as well as receivables valued at ₩8.80b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩14.2b.

Leaders Cosmetics has a market capitalization of ₩52.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Leaders Cosmetics'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, Leaders Cosmetics made a loss at the EBIT level, and saw its revenue drop to ₩71b, which is a fall of 8.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Leaders Cosmetics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩2.6b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩2.9b 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Leaders Cosmetics , and understanding them should be part of your investment process.

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.