Is E&M (KOSDAQ:089230) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, The E&M Co., Ltd. (KOSDAQ:089230) does carry debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for E&M

What Is E&M's Debt?

As you can see below, E&M had ₩38.9b of debt at June 2024, down from ₩41.4b a year prior. However, it does have ₩12.6b in cash offsetting this, leading to net debt of about ₩26.2b.

How Strong Is E&M's Balance Sheet?

According to the last reported balance sheet, E&M had liabilities of ₩50.5b due within 12 months, and liabilities of ₩465.9m due beyond 12 months. Offsetting these obligations, it had cash of ₩12.6b as well as receivables valued at ₩6.59b due within 12 months. So its liabilities total ₩31.7b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₩24.7b, we think shareholders really should watch E&M'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 E&M 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, E&M made a loss at the EBIT level, and saw its revenue drop to ₩27b, which is a fall of 30%. That makes us nervous, to say the least.

Caveat Emptor

Not only did E&M's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩7.9b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩918m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for E&M (1 makes us a bit uncomfortable) 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.