Is Leenos (KOSDAQ:039980) 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.' 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 Leenos Corp. (KOSDAQ:039980) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Leenos

What Is Leenos's Net Debt?

As you can see below, Leenos had ₩7.49b of debt at September 2020, down from ₩15.6b a year prior. But it also has ₩31.2b in cash to offset that, meaning it has ₩23.7b net cash.

How Strong Is Leenos's Balance Sheet?

The latest balance sheet data shows that Leenos had liabilities of ₩40.7b due within a year, and liabilities of ₩1.24b falling due after that. Offsetting this, it had ₩31.2b in cash and ₩2.89b in receivables that were due within 12 months. So its liabilities total ₩7.79b more than the combination of its cash and short-term receivables.

Of course, Leenos has a market capitalization of ₩48.2b, so these liabilities are probably manageable. 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, Leenos 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 you can't view debt in total isolation; since Leenos will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Leenos made a loss at the EBIT level, and saw its revenue drop to ₩58b, which is a fall of 22%. That makes us nervous, to say the least.

So How Risky Is Leenos?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Leenos lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩5.8b of cash and made a loss of ₩3.3b. With only ₩23.7b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Leenos (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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