Is NIBEC (KOSDAQ:138610) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, NIBEC Co., Ltd. (KOSDAQ:138610) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 NIBEC

How Much Debt Does NIBEC Carry?

As you can see below, NIBEC had ₩21.0b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩25.8b in cash, leading to a ₩4.84b net cash position.

How Strong Is NIBEC's Balance Sheet?

We can see from the most recent balance sheet that NIBEC had liabilities of ₩30.3b falling due within a year, and liabilities of ₩6.45b due beyond that. Offsetting this, it had ₩25.8b in cash and ₩6.65b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩4.25b.

Since publicly traded NIBEC shares are worth a total of ₩187.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, NIBEC 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 you can't view debt in total isolation; since NIBEC 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, NIBEC made a loss at the EBIT level, and saw its revenue drop to ₩18b, which is a fall of 6.9%. We would much prefer see growth.

So How Risky Is NIBEC?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NIBEC lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩11b and booked a ₩5.9b accounting loss. However, it has net cash of ₩4.84b, so it has a bit of time before it will need more capital. 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, we've discovered 2 warning signs for NIBEC (1 is significant!) that you should be aware of before investing here.

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.

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