Would StarFlex (KOSDAQ:115570) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 StarFlex Co., Ltd. (KOSDAQ:115570) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for StarFlex

How Much Debt Does StarFlex Carry?

You can click the graphic below for the historical numbers, but it shows that StarFlex had ₩19.1b of debt in June 2024, down from ₩20.3b, one year before. On the flip side, it has ₩3.13b in cash leading to net debt of about ₩16.0b.

How Strong Is StarFlex's Balance Sheet?

We can see from the most recent balance sheet that StarFlex had liabilities of ₩28.4b falling due within a year, and liabilities of ₩1.92b due beyond that. On the other hand, it had cash of ₩3.13b and ₩14.2b worth of receivables due within a year. So its liabilities total ₩12.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because StarFlex is worth ₩22.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, StarFlex made a loss at the EBIT level, and saw its revenue drop to ₩78b, which is a fall of 7.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months StarFlex produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩1.9b at the EBIT level. 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 ₩1.8b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for StarFlex (of which 1 is significant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.