Would ToolGen (KOSDAQ:199800) Be Better Off With Less 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. As with many other companies ToolGen Incorporated (KOSDAQ:199800) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ToolGen

What Is ToolGen's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 ToolGen had debt of ₩61.7b, up from none in one year. However, it does have ₩57.3b in cash offsetting this, leading to net debt of about ₩4.35b.

How Healthy Is ToolGen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ToolGen had liabilities of ₩2.46b due within 12 months and liabilities of ₩62.9b due beyond that. Offsetting these obligations, it had cash of ₩57.3b as well as receivables valued at ₩1.57b due within 12 months. So its liabilities total ₩6.52b 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 while it's hard to imagine that the ₩329.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, ToolGen has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ToolGen'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.

In the last year ToolGen wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to ₩1.1b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, ToolGen still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩20b 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. Another cause for caution is that is bled ₩17b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ToolGen (of which 1 is significant!) you should know about.

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.