Would CORESTEMCHEMON (KOSDAQ:166480) Be Better Off With Less 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CORESTEMCHEMON Inc. (KOSDAQ:166480) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CORESTEMCHEMON

What Is CORESTEMCHEMON's Net Debt?

As you can see below, at the end of March 2024, CORESTEMCHEMON had ₩41.1b of debt, up from ₩22.4b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩17.6b, its net debt is less, at about ₩23.5b.

How Strong Is CORESTEMCHEMON's Balance Sheet?

The latest balance sheet data shows that CORESTEMCHEMON had liabilities of ₩61.0b due within a year, and liabilities of ₩27.4b falling due after that. On the other hand, it had cash of ₩17.6b and ₩4.16b worth of receivables due within a year. So its liabilities total ₩66.8b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because CORESTEMCHEMON is worth ₩226.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CORESTEMCHEMON 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, CORESTEMCHEMON made a loss at the EBIT level, and saw its revenue drop to ₩30b, which is a fall of 38%. 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 ₩21b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩26b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that CORESTEMCHEMON is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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