Is CUROHOLDINGS (KOSDAQ:051780) Using Debt In A Risky Way?

Warren Buffett famously said, '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 CUROHOLDINGS Co., Ltd. (KOSDAQ:051780) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CUROHOLDINGS

How Much Debt Does CUROHOLDINGS Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CUROHOLDINGS had ₩36.1b of debt, an increase on ₩31.1b, over one year. However, because it has a cash reserve of ₩1.98b, its net debt is less, at about ₩34.2b.

How Healthy Is CUROHOLDINGS' Balance Sheet?

According to the last reported balance sheet, CUROHOLDINGS had liabilities of ₩42.2b due within 12 months, and liabilities of ₩9.98b due beyond 12 months. Offsetting this, it had ₩1.98b in cash and ₩5.83b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩44.4b.

The deficiency here weighs heavily on the ₩12.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CUROHOLDINGS would probably need a major re-capitalization if its creditors were to demand repayment. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₩65b. To be frank that doesn't bode well.

Caveat Emptor

While CUROHOLDINGS's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩5.6b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₩4.0b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For instance, we've identified 2 warning signs for CUROHOLDINGS that you should be aware of.

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.