Polaris AI (KOSDAQ:039980) 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. We can see that Polaris AI Corp. (KOSDAQ:039980) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Polaris AI

What Is Polaris AI's Debt?

As you can see below, Polaris AI had ₩10.0b of debt at June 2024, down from ₩15.1b a year prior. But on the other hand it also has ₩60.1b in cash, leading to a ₩50.1b net cash position.

A Look At Polaris AI's Liabilities

We can see from the most recent balance sheet that Polaris AI had liabilities of ₩20.0b falling due within a year, and liabilities of ₩2.92b due beyond that. Offsetting these obligations, it had cash of ₩60.1b as well as receivables valued at ₩4.12b due within 12 months. So it can boast ₩41.4b more liquid assets than total liabilities.

This surplus suggests that Polaris AI is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Polaris AI 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 Polaris AI 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.

In the last year Polaris AI had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₩55b. That makes us nervous, to say the least.

So How Risky Is Polaris AI?

Although Polaris AI had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩8.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example - Polaris AI has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.