Is CTK Cosmetics (KOSDAQ:260930) Using Debt Sensibly?

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 can see that CTK Cosmetics Co., Ltd (KOSDAQ:260930) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 CTK Cosmetics

What Is CTK Cosmetics's Debt?

As you can see below, at the end of September 2020, CTK Cosmetics had ₩3.56b of debt, up from ₩2.04b a year ago. Click the image for more detail. But it also has ₩68.1b in cash to offset that, meaning it has ₩64.5b net cash.

How Strong Is CTK Cosmetics's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CTK Cosmetics had liabilities of ₩20.2b due within 12 months and liabilities of ₩6.74b due beyond that. Offsetting these obligations, it had cash of ₩68.1b as well as receivables valued at ₩24.4b due within 12 months. So it actually has ₩65.6b more liquid assets than total liabilities.

This surplus liquidity suggests that CTK Cosmetics's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, CTK Cosmetics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is CTK Cosmetics'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 CTK Cosmetics had a loss before interest and tax, and actually shrunk its revenue by 4.3%, to ₩117b. That's not what we would hope to see.

So How Risky Is CTK Cosmetics?

Although CTK Cosmetics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩588m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. 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. Be aware that CTK Cosmetics is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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