Would Exergy21 (KOSDAQ:043090) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Exergy21 Co., Ltd. (KOSDAQ:043090) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Exergy21

How Much Debt Does Exergy21 Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Exergy21 had debt of ₩9.87b, up from ₩9.25b in one year. However, it also had ₩9.05b in cash, and so its net debt is ₩824.6m.

How Healthy Is Exergy21's Balance Sheet?

The latest balance sheet data shows that Exergy21 had liabilities of ₩25.1b due within a year, and liabilities of ₩3.19b falling due after that. On the other hand, it had cash of ₩9.05b and ₩33.8b worth of receivables due within a year. So it actually has ₩14.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that Exergy21's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 Exergy21 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.

Over 12 months, Exergy21 reported revenue of ₩11b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Exergy21 had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩16b. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Case in point: We've spotted 5 warning signs for Exergy21 you should be aware of, and 2 of them are potentially serious.

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.

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.