Health Check: How Prudently Does Wysiwyg Studios (KOSDAQ:299900) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Wysiwyg Studios Co., Ltd. (KOSDAQ:299900) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wysiwyg Studios

How Much Debt Does Wysiwyg Studios Carry?

You can click the graphic below for the historical numbers, but it shows that Wysiwyg Studios had ₩7.75b of debt in March 2024, down from ₩50.7b, one year before. But on the other hand it also has ₩27.4b in cash, leading to a ₩19.6b net cash position.

A Look At Wysiwyg Studios' Liabilities

According to the last reported balance sheet, Wysiwyg Studios had liabilities of ₩67.5b due within 12 months, and liabilities of ₩14.9b due beyond 12 months. Offsetting this, it had ₩27.4b in cash and ₩10.9b in receivables that were due within 12 months. So it has liabilities totalling ₩44.1b more than its cash and near-term receivables, combined.

Of course, Wysiwyg Studios has a market capitalization of ₩340.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Wysiwyg Studios also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wysiwyg Studios can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Wysiwyg Studios had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩122b. To be frank that doesn't bode well.

So How Risky Is Wysiwyg Studios?

While Wysiwyg Studios lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩34b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for Wysiwyg Studios you should be aware of.

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.

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.