Is Beauty Skin (KOSDAQ:406820) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Beauty Skin Corp. (KOSDAQ:406820) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Beauty Skin

How Much Debt Does Beauty Skin Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Beauty Skin had debt of ₩32.3b, up from ₩27.6b in one year. On the flip side, it has ₩6.26b in cash leading to net debt of about ₩26.1b.

How Strong Is Beauty Skin's Balance Sheet?

According to the last reported balance sheet, Beauty Skin had liabilities of ₩42.8b due within 12 months, and liabilities of ₩1.66b due beyond 12 months. On the other hand, it had cash of ₩6.26b and ₩26.3b worth of receivables due within a year. So it has liabilities totalling ₩11.9b more than its cash and near-term receivables, combined.

Of course, Beauty Skin has a market capitalization of ₩60.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beauty Skin'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 Beauty Skin wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to ₩90b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Beauty Skin still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩3.9b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩6.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 4 warning signs for Beauty Skin (2 can't be ignored!) that you should be aware of before investing here.

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.