Is Barunson Entertainment & Arts (KOSDAQ:035620) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Barunson Entertainment & Arts Corporation (KOSDAQ:035620) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Barunson Entertainment & Arts

How Much Debt Does Barunson Entertainment & Arts Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Barunson Entertainment & Arts had debt of ₩32.8b, up from ₩30.8b in one year. On the flip side, it has ₩7.97b in cash leading to net debt of about ₩24.8b.

How Strong Is Barunson Entertainment & Arts' Balance Sheet?

According to the last reported balance sheet, Barunson Entertainment & Arts had liabilities of ₩37.8b due within 12 months, and liabilities of ₩11.4b due beyond 12 months. Offsetting this, it had ₩7.97b in cash and ₩2.53b in receivables that were due within 12 months. So it has liabilities totalling ₩38.7b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩29.7b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Barunson Entertainment & Arts 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 Barunson Entertainment & Arts had a loss before interest and tax, and actually shrunk its revenue by 51%, to ₩13b. That makes us nervous, to say the least.

Caveat Emptor

While Barunson Entertainment & Arts's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩1.6b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩2.3b over the last twelve months. That means it's on the risky side of things. 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. Be aware that Barunson Entertainment & Arts is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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

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.