Is Artist United (KOSDAQ:321820) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Artist United Inc. (KOSDAQ:321820) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Artist United

What Is Artist United's Debt?

You can click the graphic below for the historical numbers, but it shows that Artist United had ₩11.5b of debt in March 2024, down from ₩18.4b, one year before. However, its balance sheet shows it holds ₩22.1b in cash, so it actually has ₩10.6b net cash.

How Healthy Is Artist United's Balance Sheet?

We can see from the most recent balance sheet that Artist United had liabilities of ₩23.5b falling due within a year, and liabilities of ₩349.0m due beyond that. Offsetting this, it had ₩22.1b in cash and ₩1.48b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Artist United's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩141.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Artist United also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Artist United will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Artist United made a loss at the EBIT level, and saw its revenue drop to ₩19b, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Artist United?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Artist United had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩2.2b and booked a ₩5.5b accounting loss. But the saving grace is the ₩10.6b on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example Artist United has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.