These 4 Measures Indicate That WemadeLtd (KOSDAQ:112040) Is Using Debt Extensively

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Wemade Co.,Ltd. (KOSDAQ:112040) does use debt in its business. But is this debt a concern to shareholders?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is WemadeLtd's Net Debt?

As you can see below, at the end of December 2024, WemadeLtd had ₩168.3b of debt, up from ₩135.1b a year ago. Click the image for more detail. But on the other hand it also has ₩329.2b in cash, leading to a ₩160.9b net cash position.

How Healthy Is WemadeLtd's Balance Sheet?

According to the last reported balance sheet, WemadeLtd had liabilities of ₩954.9b due within 12 months, and liabilities of ₩62.5b due beyond 12 months. On the other hand, it had cash of ₩329.2b and ₩132.4b worth of receivables due within a year. So its liabilities total ₩555.9b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩797.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, WemadeLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for WemadeLtd

We also note that WemadeLtd improved its EBIT from a last year's loss to a positive ₩4.5b. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine WemadeLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WemadeLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, WemadeLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

Although WemadeLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩160.9b. Despite its cash we think that WemadeLtd seems to struggle to convert EBIT to free cash flow, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with WemadeLtd , and understanding them should be part of your investment process.

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.

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

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.