STARFLEX (KOSDAQ:115570) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, STARFLEX Co., Ltd. (KOSDAQ:115570) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for STARFLEX

What Is STARFLEX's Debt?

As you can see below, STARFLEX had ₩55.7b of debt at September 2020, down from ₩59.7b a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is STARFLEX's Balance Sheet?

According to the last reported balance sheet, STARFLEX had liabilities of ₩47.2b due within 12 months, and liabilities of ₩21.9b due beyond 12 months. On the other hand, it had cash of ₩660.3m and ₩15.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩53.1b.

Given this deficit is actually higher than the company's market capitalization of ₩37.5b, we think shareholders really should watch STARFLEX's debt levels, like a parent watching their child ride a bike for the first time. 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. There's no doubt that we learn most about debt from the balance sheet. But it is STARFLEX'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 STARFLEX had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₩75b. That makes us nervous, to say the least.

Caveat Emptor

Not only did STARFLEX's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩3.4b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩4.5b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for STARFLEX (2 shouldn't be ignored!) that you should be aware of before investing here.

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. 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.
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