Would Tonymoly (KRX:214420) Be Better Off With Less Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Tonymoly Co., Ltd (KRX:214420) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tonymoly

What Is Tonymoly's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Tonymoly had debt of ₩72.9b, up from ₩57.5b in one year. However, it also had ₩39.9b in cash, and so its net debt is ₩32.9b.

A Look At Tonymoly's Liabilities

According to the last reported balance sheet, Tonymoly had liabilities of ₩67.1b due within 12 months, and liabilities of ₩64.7b due beyond 12 months. Offsetting this, it had ₩39.9b in cash and ₩20.4b in receivables that were due within 12 months. So its liabilities total ₩71.5b more than the combination of its cash and short-term receivables.

Tonymoly has a market capitalization of ₩172.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 future earnings, more than anything, that will determine Tonymoly's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tonymoly had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₩146b. We would much prefer see growth.

Caveat Emptor

Not only did Tonymoly'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 ₩17b. 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 ₩11b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Tonymoly you should be aware of.

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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