Here's Why Barunson Entertainment & Arts (KOSDAQ:035620) Can Afford Some 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Barunson Entertainment & Arts Corporation (KOSDAQ:035620) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Barunson Entertainment & Arts

How Much Debt Does Barunson Entertainment & Arts Carry?

As you can see below, Barunson Entertainment & Arts had ₩21.6b of debt at September 2020, down from ₩24.7b a year prior. However, because it has a cash reserve of ₩9.55b, its net debt is less, at about ₩12.0b.

How Strong Is Barunson Entertainment & Arts' Balance Sheet?

The latest balance sheet data shows that Barunson Entertainment & Arts had liabilities of ₩8.47b due within a year, and liabilities of ₩22.4b falling due after that. Offsetting these obligations, it had cash of ₩9.55b as well as receivables valued at ₩553.4m due within 12 months. So its liabilities total ₩20.8b more than the combination of its cash and short-term receivables.

Since publicly traded Barunson Entertainment & Arts shares are worth a total of ₩109.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Barunson Entertainment & Arts'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.

Over 12 months, Barunson Entertainment & Arts reported revenue of ₩23b, which is a gain of 233%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Barunson Entertainment & Arts still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩2.5b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩4.7b. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Barunson Entertainment & Arts you should be aware of, and 1 of them is a bit unpleasant.

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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