Does Outin Futures (KOSDAQ:227610) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Outin Futures Co., Ltd (KOSDAQ:227610) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Outin Futures

What Is Outin Futures's Debt?

As you can see below, Outin Futures had ₩21.9b of debt at June 2024, down from ₩32.2b a year prior. However, because it has a cash reserve of ₩8.79b, its net debt is less, at about ₩13.1b.

How Healthy Is Outin Futures' Balance Sheet?

We can see from the most recent balance sheet that Outin Futures had liabilities of ₩23.8b falling due within a year, and liabilities of ₩6.92b due beyond that. On the other hand, it had cash of ₩8.79b and ₩6.88b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩15.0b.

While this might seem like a lot, it is not so bad since Outin Futures has a market capitalization of ₩53.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Outin Futures's earnings that will influence how the balance sheet holds up in the future. 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 Outin Futures had a loss before interest and tax, and actually shrunk its revenue by 8.8%, to ₩31b. That's not what we would hope to see.

Caveat Emptor

Importantly, Outin Futures had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.1b 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 ₩6.0b of cash over the last year. So in short it's a really risky stock. 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 2 warning signs for Outin Futures 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.