Is CUROHOLDINGS (KOSDAQ:051780) 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. We note that CUROHOLDINGS Co., Ltd. (KOSDAQ:051780) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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

View our latest analysis for CUROHOLDINGS

What Is CUROHOLDINGS's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 CUROHOLDINGS had debt of ₩33.9b, up from ₩24.3b in one year. On the flip side, it has ₩2.82b in cash leading to net debt of about ₩31.1b.

How Healthy Is CUROHOLDINGS' Balance Sheet?

According to the last reported balance sheet, CUROHOLDINGS had liabilities of ₩34.6b due within 12 months, and liabilities of ₩9.90b due beyond 12 months. Offsetting these obligations, it had cash of ₩2.82b as well as receivables valued at ₩4.12b due within 12 months. So its liabilities total ₩37.6b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₩33.3b, we think shareholders really should watch CUROHOLDINGS's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CUROHOLDINGS 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.

In the last year CUROHOLDINGS wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩82b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, CUROHOLDINGS had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩6.2b at the EBIT level. 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 ₩8.0b over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with CUROHOLDINGS (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.

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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.