Is NEORIGIN (KOSDAQ:094860) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 NEORIGIN Co., Ltd. (KOSDAQ:094860) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for NEORIGIN

How Much Debt Does NEORIGIN Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 NEORIGIN had ₩6.19b of debt, an increase on ₩2.85b, over one year. But it also has ₩10.1b in cash to offset that, meaning it has ₩3.91b net cash.

How Healthy Is NEORIGIN's Balance Sheet?

The latest balance sheet data shows that NEORIGIN had liabilities of ₩12.2b due within a year, and liabilities of ₩420.6m falling due after that. Offsetting this, it had ₩10.1b in cash and ₩8.92b in receivables that were due within 12 months. So it can boast ₩6.40b more liquid assets than total liabilities.

It's good to see that NEORIGIN has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that NEORIGIN has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NEORIGIN's earnings that will influence how the balance sheet holds up in the future. 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 NEORIGIN had a loss before interest and tax, and actually shrunk its revenue by 18%, to ₩25b. That's not what we would hope to see.

So How Risky Is NEORIGIN?

While NEORIGIN lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩2.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 NEORIGIN (1 makes us a bit uncomfortable) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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