LEMON (KOSDAQ:294140) Is Making Moderate Use Of Debt

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. As with many other companies LEMON Co., Ltd. (KOSDAQ:294140) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LEMON

What Is LEMON's Debt?

You can click the graphic below for the historical numbers, but it shows that LEMON had ₩6.00b of debt in September 2024, down from ₩9.10b, one year before. However, because it has a cash reserve of ₩5.93b, its net debt is less, at about ₩67.8m.

A Look At LEMON's Liabilities

The latest balance sheet data shows that LEMON had liabilities of ₩7.76b due within a year, and liabilities of ₩10.8m falling due after that. Offsetting these obligations, it had cash of ₩5.93b as well as receivables valued at ₩1.18b due within 12 months. So its liabilities total ₩659.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that LEMON'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 ₩72.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, LEMON has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is LEMON'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 LEMON had a loss before interest and tax, and actually shrunk its revenue by 43%, to ₩8.0b. To be frank that doesn't bode well.

Caveat Emptor

While LEMON's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩7.6b at the EBIT level. 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. Another cause for caution is that is bled ₩8.0b in negative free cash flow over the last twelve months. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for LEMON (of which 2 can't be ignored!) 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.