Is NEXTEEL (KRX:092790) 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 NEXTEEL Co., Ltd. (KRX:092790) does use debt in its business. 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. 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, 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.

View our latest analysis for NEXTEEL

How Much Debt Does NEXTEEL Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 NEXTEEL had ₩72.2b of debt, an increase on ₩59.4b, over one year. However, it does have ₩100.4b in cash offsetting this, leading to net cash of ₩28.1b.

How Strong Is NEXTEEL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NEXTEEL had liabilities of ₩187.2b due within 12 months and liabilities of ₩40.0b due beyond that. Offsetting this, it had ₩100.4b in cash and ₩66.0b in receivables that were due within 12 months. So its liabilities total ₩60.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since NEXTEEL has a market capitalization of ₩252.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, NEXTEEL also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for NEXTEEL if management cannot prevent a repeat of the 64% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is NEXTEEL'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NEXTEEL has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, NEXTEEL's free cash flow amounted to 34% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although NEXTEEL's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩28.1b. So although we see some areas for improvement, we're not too worried about NEXTEEL's balance sheet. 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. Be aware that NEXTEEL is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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.