Is Com2uS Holdings (KOSDAQ:063080) Using Too Much Debt?

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 can see that Com2uS Holdings Corporation (KOSDAQ:063080) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Com2uS Holdings

What Is Com2uS Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Com2uS Holdings had ₩175.9b in debt in December 2023; about the same as the year before. On the flip side, it has ₩29.5b in cash leading to net debt of about ₩146.4b.

A Look At Com2uS Holdings' Liabilities

We can see from the most recent balance sheet that Com2uS Holdings had liabilities of ₩179.6b falling due within a year, and liabilities of ₩142.7b due beyond that. Offsetting these obligations, it had cash of ₩29.5b as well as receivables valued at ₩14.0b due within 12 months. So it has liabilities totalling ₩278.8b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩218.6b market capitalization, you might well be inclined to review the balance sheet intently. 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Com2uS Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Com2uS Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to ₩153b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Com2uS Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩199m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩9.3b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 example - Com2uS Holdings has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.