ToolGen (KOSDAQ:199800) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, ToolGen Incorporated (KOSDAQ:199800) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ToolGen

How Much Debt Does ToolGen Carry?

As you can see below, at the end of March 2024, ToolGen had ₩61.0b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩61.8b in cash, leading to a ₩798.0m net cash position.

How Strong Is ToolGen's Balance Sheet?

According to the last reported balance sheet, ToolGen had liabilities of ₩2.26b due within 12 months, and liabilities of ₩62.3b due beyond 12 months. Offsetting this, it had ₩61.8b in cash and ₩1.36b in receivables that were due within 12 months. So its liabilities total ₩1.41b more than the combination of its cash and short-term receivables.

This state of affairs indicates that ToolGen's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩511.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ToolGen also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 ToolGen 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.

In the last year ToolGen wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to ₩1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ToolGen?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ToolGen had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩19b and booked a ₩44b accounting loss. But the saving grace is the ₩798.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, ToolGen may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example, we've discovered 2 warning signs for ToolGen (1 doesn't sit too well with us!) 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.

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