Is ADM Korea (KOSDAQ:187660) Using Debt Sensibly?

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.' 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. Importantly, ADM Korea Inc. (KOSDAQ:187660) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ADM Korea

How Much Debt Does ADM Korea Carry?

As you can see below, at the end of June 2024, ADM Korea had ₩7.48b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩20.5b in cash, so it actually has ₩13.0b net cash.

How Healthy Is ADM Korea's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ADM Korea had liabilities of ₩29.2b due within 12 months and liabilities of ₩1.82b due beyond that. Offsetting this, it had ₩20.5b in cash and ₩1.67b in receivables that were due within 12 months. So its liabilities total ₩8.85b more than the combination of its cash and short-term receivables.

Given ADM Korea has a market capitalization of ₩67.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ADM Korea 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 ADM Korea'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.

Over 12 months, ADM Korea made a loss at the EBIT level, and saw its revenue drop to ₩12b, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is ADM Korea?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year ADM Korea had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩3.0b and booked a ₩16b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩13.0b. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for ADM Korea you should be aware of, and 1 of them shouldn't be ignored.

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.