Is Next Entertainment World (KOSDAQ:160550) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Next Entertainment World Co., Ltd. (KOSDAQ:160550) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

See our latest analysis for Next Entertainment World

What Is Next Entertainment World's Debt?

As you can see below, Next Entertainment World had ₩103.1b of debt at September 2024, down from ₩118.4b a year prior. On the flip side, it has ₩72.3b in cash leading to net debt of about ₩30.8b.

How Healthy Is Next Entertainment World's Balance Sheet?

We can see from the most recent balance sheet that Next Entertainment World had liabilities of ₩131.9b falling due within a year, and liabilities of ₩13.4b due beyond that. On the other hand, it had cash of ₩72.3b and ₩13.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩59.5b.

Given this deficit is actually higher than the company's market capitalization of ₩55.3b, we think shareholders really should watch Next Entertainment World'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. There's no doubt that we learn most about debt from the balance sheet. But it is Next Entertainment World'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 Next Entertainment World had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to ₩127b. That's not what we would hope to see.

Caveat Emptor

Importantly, Next Entertainment World had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩14b. 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. Not least because it had negative free cash flow of ₩8.0b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Next Entertainment World (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.