Would Leaders Cosmetics (KOSDAQ:016100) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Leaders Cosmetics Co., Ltd. (KOSDAQ:016100) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Leaders Cosmetics

How Much Debt Does Leaders Cosmetics Carry?

As you can see below, Leaders Cosmetics had ₩25.0b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩13.5b in cash leading to net debt of about ₩11.5b.

How Strong Is Leaders Cosmetics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Leaders Cosmetics had liabilities of ₩32.7b due within 12 months and liabilities of ₩2.95b due beyond that. Offsetting this, it had ₩13.5b in cash and ₩8.77b in receivables that were due within 12 months. So it has liabilities totalling ₩13.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Leaders Cosmetics is worth ₩55.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Leaders Cosmetics had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩70b. We would much prefer see growth.

Caveat Emptor

While Leaders Cosmetics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩3.5b. 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 ₩3.8b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Leaders Cosmetics (of which 1 makes us a bit uncomfortable!) 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.