Is Skin n Skin (KOSDAQ:159910) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Skin n Skin Co., Ltd. (KOSDAQ:159910) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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

Check out our latest analysis for Skin n Skin

What Is Skin n Skin's Net Debt?

The chart below, which you can click on for greater detail, shows that Skin n Skin had ₩2.17b in debt in December 2023; about the same as the year before. But on the other hand it also has ₩6.69b in cash, leading to a ₩4.52b net cash position.

How Strong Is Skin n Skin's Balance Sheet?

We can see from the most recent balance sheet that Skin n Skin had liabilities of ₩6.88b falling due within a year, and liabilities of ₩2.35b due beyond that. Offsetting this, it had ₩6.69b in cash and ₩2.70b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Skin n Skin's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩29.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Skin n Skin boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Skin n Skin will need earnings to service that debt. 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 Skin n Skin wasn't profitable at an EBIT level, but managed to grow its revenue by 5.0%, to ₩14b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Skin n Skin?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Skin n Skin lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩5.8b and booked a ₩7.2b accounting loss. But at least it has ₩4.52b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Skin n Skin has 3 warning signs (and 1 which can't be ignored) we think 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.