Is KPM TECH (KOSDAQ:042040) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that KPM TECH Co., Ltd. (KOSDAQ:042040) does use debt in its business. But should shareholders be worried about its use of debt?

Our free stock report includes 1 warning sign investors should be aware of before investing in KPM TECH. Read for free now.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is KPM TECH's Net Debt?

As you can see below, at the end of December 2024, KPM TECH had ₩58.2b of debt, up from ₩33.9b a year ago. Click the image for more detail. However, it also had ₩14.0b in cash, and so its net debt is ₩44.1b.

How Strong Is KPM TECH's Balance Sheet?

The latest balance sheet data shows that KPM TECH had liabilities of ₩72.6b due within a year, and liabilities of ₩8.35b falling due after that. Offsetting this, it had ₩14.0b in cash and ₩11.8b in receivables that were due within 12 months. So its liabilities total ₩55.0b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩48.9b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KPM TECH'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.

See our latest analysis for KPM TECH

In the last year KPM TECH had a loss before interest and tax, and actually shrunk its revenue by 37%, to ₩29b. To be frank that doesn't bode well.

Caveat Emptor

Not only did KPM TECH's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩4.6b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩1.1b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with KPM TECH .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.