Is Coreana CosmeticsLtd (KOSDAQ:027050) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Coreana Cosmetics Co.,Ltd. (KOSDAQ:027050) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Coreana CosmeticsLtd

What Is Coreana CosmeticsLtd's Debt?

As you can see below, Coreana CosmeticsLtd had ₩12.2b of debt at September 2020, down from ₩13.1b a year prior. However, it does have ₩9.08b in cash offsetting this, leading to net debt of about ₩3.08b.

A Look At Coreana CosmeticsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Coreana CosmeticsLtd had liabilities of ₩23.6b due within 12 months and liabilities of ₩13.6b due beyond that. Offsetting this, it had ₩9.08b in cash and ₩9.74b in receivables that were due within 12 months. So it has liabilities totalling ₩18.4b more than its cash and near-term receivables, combined.

Given Coreana CosmeticsLtd has a market capitalization of ₩150.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Coreana CosmeticsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Coreana CosmeticsLtd made a loss at the EBIT level, and saw its revenue drop to ₩91b, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Coreana CosmeticsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩322m. 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. For example, we would not want to see a repeat of last year's loss of ₩1.4b. So to be blunt we do think it is 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. Case in point: We've spotted 1 warning sign for Coreana CosmeticsLtd you should be aware of.

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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