Is WAPS (KOSDAQ:196700) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, WAPS Co., Ltd (KOSDAQ:196700) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for WAPS

How Much Debt Does WAPS Carry?

The image below, which you can click on for greater detail, shows that at September 2020 WAPS had debt of ₩27.6b, up from ₩25.9b in one year. However, it also had ₩12.7b in cash, and so its net debt is ₩14.9b.

How Healthy Is WAPS's Balance Sheet?

The latest balance sheet data shows that WAPS had liabilities of ₩29.0b due within a year, and liabilities of ₩2.26b falling due after that. Offsetting these obligations, it had cash of ₩12.7b as well as receivables valued at ₩4.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩14.3b.

WAPS has a market capitalization of ₩24.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is WAPS'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.

Over 12 months, WAPS saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, WAPS had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩787m. 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. For example, we would not want to see a repeat of last year's loss of ₩2.5b. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for WAPS (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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