NDFOS (KOSDAQ:238090) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies NDFOS Co., Ltd. (KOSDAQ:238090) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, 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 NDFOS

How Much Debt Does NDFOS Carry?

As you can see below, NDFOS had ₩5.61b of debt at March 2024, down from ₩14.2b a year prior. However, it does have ₩37.2b in cash offsetting this, leading to net cash of ₩31.6b.

How Strong Is NDFOS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NDFOS had liabilities of ₩15.2b due within 12 months and liabilities of ₩950.2m due beyond that. Offsetting these obligations, it had cash of ₩37.2b as well as receivables valued at ₩17.2b due within 12 months. So it can boast ₩38.2b more liquid assets than total liabilities.

This excess liquidity is a great indication that NDFOS' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, NDFOS boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is NDFOS'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.

In the last year NDFOS had a loss before interest and tax, and actually shrunk its revenue by 35%, to ₩52b. That makes us nervous, to say the least.

So How Risky Is NDFOS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year NDFOS had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩9.1b of cash and made a loss of ₩12b. While this does make the company a bit risky, it's important to remember it has net cash of ₩31.6b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NDFOS (of which 1 can't be ignored!) you should know about.

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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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.