Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Leenos Corp. (KOSDAQ:039980) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Leenos's Net Debt?
The image below, which you can click on for greater detail, shows that Leenos had debt of ₩7.49b at the end of September 2020, a reduction from ₩15.6b over a year. However, it does have ₩31.2b in cash offsetting this, leading to net cash of ₩23.7b.
How Healthy Is Leenos' Balance Sheet?
According to the last reported balance sheet, Leenos had liabilities of ₩40.7b due within 12 months, and liabilities of ₩1.24b due beyond 12 months. Offsetting this, it had ₩31.2b in cash and ₩2.89b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩7.79b.
Given Leenos has a market capitalization of ₩49.2b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Leenos boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Leenos'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.
In the last year Leenos had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩58b. To be frank that doesn't bode well.
So How Risky Is Leenos?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Leenos had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩5.8b of cash and made a loss of ₩3.3b. Given it only has net cash of ₩23.7b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Leenos (including 1 which doesn't sit too well with us) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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