Is Artist Studio (KOSDAQ:200350) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Artist Studio Inc. (KOSDAQ:200350) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Artist Studio

What Is Artist Studio's Debt?

You can click the graphic below for the historical numbers, but it shows that Artist Studio had ₩4.00b of debt in September 2024, down from ₩6.70b, one year before. But it also has ₩53.0b in cash to offset that, meaning it has ₩49.0b net cash.

How Healthy Is Artist Studio's Balance Sheet?

According to the last reported balance sheet, Artist Studio had liabilities of ₩5.79b due within 12 months, and liabilities of ₩4.14b due beyond 12 months. Offsetting this, it had ₩53.0b in cash and ₩4.85b in receivables that were due within 12 months. So it actually has ₩48.0b more liquid assets than total liabilities.

This surplus liquidity suggests that Artist Studio's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Artist Studio 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 Artist Studio'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 Artist Studio had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₩32b. That makes us nervous, to say the least.

So How Risky Is Artist Studio?

While Artist Studio lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩388m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that Artist Studio is showing 3 warning signs in our investment analysis , you should know about...

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.

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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.