Does Wemade Play (KOSDAQ:123420) Have A Healthy Balance Sheet?

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.' 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 Play Co., Ltd. (KOSDAQ:123420) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wemade Play

What Is Wemade Play's Debt?

The image below, which you can click on for greater detail, shows that Wemade Play had debt of ₩109.4b at the end of September 2024, a reduction from ₩118.2b over a year. However, because it has a cash reserve of ₩52.9b, its net debt is less, at about ₩56.5b.

How Healthy Is Wemade Play's Balance Sheet?

We can see from the most recent balance sheet that Wemade Play had liabilities of ₩128.0b falling due within a year, and liabilities of ₩37.1b due beyond that. On the other hand, it had cash of ₩52.9b and ₩9.78b worth of receivables due within a year. So its liabilities total ₩102.4b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₩73.1b, we think shareholders really should watch Wemade Play's debt levels, like a parent watching their child ride a bike for the first time. 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 you can't view debt in total isolation; since Wemade Play 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 Wemade Play had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to ₩120b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Wemade Play produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩790m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩1.5b and the profit of ₩1.0b. So there is definitely a chance that it can improve things in the next few years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Wemade Play (including 1 which is significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.