Is 4by4 (KOSDAQ:389140) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, 4by4 Inc (KOSDAQ:389140) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 4by4

What Is 4by4's Net Debt?

As you can see below, 4by4 had ₩3.70b of debt at March 2024, down from ₩4.96b a year prior. However, its balance sheet shows it holds ₩16.6b in cash, so it actually has ₩12.9b net cash.

How Strong Is 4by4's Balance Sheet?

The latest balance sheet data shows that 4by4 had liabilities of ₩17.7b due within a year, and liabilities of ₩3.32b falling due after that. Offsetting this, it had ₩16.6b in cash and ₩5.93b in receivables that were due within 12 months. So it actually has ₩1.50b more liquid assets than total liabilities.

This state of affairs indicates that 4by4's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩86.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 4by4 boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is 4by4'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.

In the last year 4by4 wasn't profitable at an EBIT level, but managed to grow its revenue by 90%, to ₩38b. With any luck the company will be able to grow its way to profitability.

So How Risky Is 4by4?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 4by4 had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩11b and booked a ₩22b accounting loss. However, it has net cash of ₩12.9b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, 4by4 may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for 4by4 (1 is potentially serious) you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com