Is Barunson Entertainment & Arts (KOSDAQ:035620) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Barunson Entertainment & Arts Corporation (KOSDAQ:035620) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Barunson Entertainment & Arts

What Is Barunson Entertainment & Arts's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Barunson Entertainment & Arts had ₩38.4b of debt, an increase on ₩29.2b, over one year. However, it does have ₩8.56b in cash offsetting this, leading to net debt of about ₩29.8b.

How Healthy Is Barunson Entertainment & Arts' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Barunson Entertainment & Arts had liabilities of ₩32.4b due within 12 months and liabilities of ₩24.7b due beyond that. Offsetting this, it had ₩8.56b in cash and ₩1.85b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩46.7b.

Given this deficit is actually higher than the company's market capitalization of ₩40.1b, we think shareholders really should watch Barunson Entertainment & Arts's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Barunson Entertainment & Arts will need earnings to service that debt. 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.

Over 12 months, Barunson Entertainment & Arts made a loss at the EBIT level, and saw its revenue drop to ₩21b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Barunson Entertainment & Arts's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩2.9b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩3.3b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Barunson Entertainment & Arts has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com