Health Check: How Prudently Does NANOCMSLtd (KOSDAQ:247660) Use 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.' 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. We note that NANOCMS Co.,Ltd (KOSDAQ:247660) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does NANOCMSLtd Carry?

As you can see below, NANOCMSLtd had ₩6.41b of debt at September 2024, down from ₩13.5b a year prior. However, its balance sheet shows it holds ₩14.7b in cash, so it actually has ₩8.28b net cash.

How Strong Is NANOCMSLtd's Balance Sheet?

According to the last reported balance sheet, NANOCMSLtd had liabilities of ₩11.3b due within 12 months, and liabilities of ₩1.16b due beyond 12 months. Offsetting this, it had ₩14.7b in cash and ₩468.2m in receivables that were due within 12 months. So it actually has ₩2.70b more liquid assets than total liabilities.

This surplus suggests that NANOCMSLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NANOCMSLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NANOCMSLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for NANOCMSLtd

Over 12 months, NANOCMSLtd made a loss at the EBIT level, and saw its revenue drop to ₩4.9b, which is a fall of 16%. We would much prefer see growth.

So How Risky Is NANOCMSLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NANOCMSLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩290m of cash and made a loss of ₩6.7b. While this does make the company a bit risky, it's important to remember it has net cash of ₩8.28b. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NANOCMSLtd is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.