Is ISU Chemical (KRX:005950) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that ISU Chemical Co., Ltd (KRX:005950) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ISU Chemical

What Is ISU Chemical's Debt?

The image below, which you can click on for greater detail, shows that ISU Chemical had debt of ₩389.2b at the end of June 2024, a reduction from ₩468.4b over a year. However, because it has a cash reserve of ₩129.0b, its net debt is less, at about ₩260.1b.

A Look At ISU Chemical's Liabilities

Zooming in on the latest balance sheet data, we can see that ISU Chemical had liabilities of ₩555.4b due within 12 months and liabilities of ₩136.7b due beyond that. On the other hand, it had cash of ₩129.0b and ₩215.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩347.7b.

This deficit casts a shadow over the ₩148.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, ISU Chemical would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ISU Chemical 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.

In the last year ISU Chemical had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₩1.9t. That's not what we would hope to see.

Caveat Emptor

While ISU Chemical's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩44b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩41b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for ISU Chemical (1 is a bit unpleasant!) that you should be aware of before investing here.

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.