Is CORESTEMCHEMON (KOSDAQ:166480) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that CORESTEMCHEMON Inc. (KOSDAQ:166480) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CORESTEMCHEMON

What Is CORESTEMCHEMON's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CORESTEMCHEMON had ₩40.0b of debt, an increase on ₩27.5b, over one year. However, it does have ₩2.50b in cash offsetting this, leading to net debt of about ₩37.5b.

A Look At CORESTEMCHEMON's Liabilities

We can see from the most recent balance sheet that CORESTEMCHEMON had liabilities of ₩52.6b falling due within a year, and liabilities of ₩26.6b due beyond that. Offsetting these obligations, it had cash of ₩2.50b as well as receivables valued at ₩4.63b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩72.0b.

This deficit is considerable relative to its market capitalization of ₩96.8b, so it does suggest shareholders should keep an eye on CORESTEMCHEMON's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CORESTEMCHEMON's earnings that will influence how the balance sheet holds up in the future. 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, CORESTEMCHEMON made a loss at the EBIT level, and saw its revenue drop to ₩29b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did CORESTEMCHEMON's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩24b at the EBIT level. 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. Another cause for caution is that is bled ₩41b in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example CORESTEMCHEMON has 4 warning signs (and 3 which make us uncomfortable) 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.