Here's Why LTCLtd (KOSDAQ:170920) Can Afford Some Debt

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 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. As with many other companies LTC Co.,Ltd (KOSDAQ:170920) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for LTCLtd

What Is LTCLtd's Debt?

As you can see below, LTCLtd had ₩118.3b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩69.5b in cash offsetting this, leading to net debt of about ₩48.8b.

How Strong Is LTCLtd's Balance Sheet?

According to the last reported balance sheet, LTCLtd had liabilities of ₩173.4b due within 12 months, and liabilities of ₩5.42b due beyond 12 months. On the other hand, it had cash of ₩69.5b and ₩16.5b worth of receivables due within a year. So it has liabilities totalling ₩92.8b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩144.8b, so it does suggest shareholders should keep an eye on LTCLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is LTCLtd'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 LTCLtd had a loss before interest and tax, and actually shrunk its revenue by 48%, to ₩113b. That makes us nervous, to say the least.

Caveat Emptor

Not only did LTCLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩16b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩21b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for LTCLtd (2 are a bit unpleasant) you should be aware of.

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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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.