Would M2NLtd (KOSDAQ:033310) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies M2N Co.,Ltd (KOSDAQ:033310) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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.

View our latest analysis for M2NLtd

What Is M2NLtd's Debt?

As you can see below, at the end of September 2020, M2NLtd had ₩29.2b of debt, up from ₩23.3b a year ago. Click the image for more detail. However, it also had ₩7.01b in cash, and so its net debt is ₩22.2b.

A Look At M2NLtd's Liabilities

According to the last reported balance sheet, M2NLtd had liabilities of ₩35.4b due within 12 months, and liabilities of ₩11.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩7.01b as well as receivables valued at ₩10.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩29.4b.

Since publicly traded M2NLtd shares are worth a total of ₩310.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since M2NLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, M2NLtd made a loss at the EBIT level, and saw its revenue drop to ₩36b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While M2NLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩1.8b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩10b of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that M2NLtd is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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