COPUS KOREA (KOSDAQ:322780) Is Making Moderate Use Of 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 COPUS KOREA Co., Ltd. (KOSDAQ:322780) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for COPUS KOREA

What Is COPUS KOREA's Net Debt?

You can click the graphic below for the historical numbers, but it shows that COPUS KOREA had ₩49.6b of debt in September 2024, down from ₩56.2b, one year before. On the flip side, it has ₩34.8b in cash leading to net debt of about ₩14.8b.

How Healthy Is COPUS KOREA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that COPUS KOREA had liabilities of ₩67.2b due within 12 months and liabilities of ₩1.48b due beyond that. On the other hand, it had cash of ₩34.8b and ₩6.30b worth of receivables due within a year. So it has liabilities totalling ₩27.6b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩36.6b, so it does suggest shareholders should keep an eye on COPUS KOREA's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 COPUS KOREA will need earnings to service that debt. 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 COPUS KOREA had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₩33b. To be frank that doesn't bode well.

Caveat Emptor

While COPUS KOREA's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩25b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩16b. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example COPUS KOREA has 3 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.