Is Cube Entertainment (KOSDAQ:182360) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Cube Entertainment, Inc. (KOSDAQ:182360) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cube Entertainment

What Is Cube Entertainment's Net Debt?

As you can see below, at the end of September 2024, Cube Entertainment had ₩26.5b of debt, up from ₩1.08b a year ago. Click the image for more detail. But it also has ₩70.1b in cash to offset that, meaning it has ₩43.6b net cash.

How Strong Is Cube Entertainment's Balance Sheet?

We can see from the most recent balance sheet that Cube Entertainment had liabilities of ₩71.7b falling due within a year, and liabilities of ₩40.4b due beyond that. Offsetting these obligations, it had cash of ₩70.1b as well as receivables valued at ₩15.8b due within 12 months. So its liabilities total ₩26.3b more than the combination of its cash and short-term receivables.

Of course, Cube Entertainment has a market capitalization of ₩217.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Cube Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Cube Entertainment grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Cube Entertainment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Cube Entertainment 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. Over the last three years, Cube Entertainment actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Cube Entertainment does have more liabilities than liquid assets, it also has net cash of ₩43.6b. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in -₩3.5b. So we don't think Cube Entertainment's use of debt is risky. 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. Be aware that Cube Entertainment is showing 1 warning sign in our investment analysis , you should know about...

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.