Is Cosmax Nbt (KOSDAQ:222040) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Cosmax Nbt, Inc. (KOSDAQ:222040) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cosmax Nbt

What Is Cosmax Nbt's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Cosmax Nbt had debt of ₩186.7b, up from ₩122.2b in one year. However, it also had ₩38.0b in cash, and so its net debt is ₩148.7b.

A Look At Cosmax Nbt's Liabilities

We can see from the most recent balance sheet that Cosmax Nbt had liabilities of ₩193.5b falling due within a year, and liabilities of ₩36.7b due beyond that. Offsetting this, it had ₩38.0b in cash and ₩48.4b in receivables that were due within 12 months. So its liabilities total ₩143.9b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩158.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cosmax Nbt can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cosmax Nbt wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to ₩256b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Cosmax Nbt managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₩8.8b 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩3.9b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For example, we've discovered 2 warning signs for Cosmax Nbt (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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