Here's Why eSang NetworksLtd (KOSDAQ:080010) Has A Meaningful Debt Burden

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 eSang Networks Co.,Ltd (KOSDAQ:080010) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for eSang NetworksLtd

What Is eSang NetworksLtd's Debt?

As you can see below, eSang NetworksLtd had ₩18.5b of debt at December 2020, down from ₩32.8b a year prior. But it also has ₩30.5b in cash to offset that, meaning it has ₩12.0b net cash.

How Healthy Is eSang NetworksLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that eSang NetworksLtd had liabilities of ₩27.6b due within 12 months and liabilities of ₩15.7b due beyond that. On the other hand, it had cash of ₩30.5b and ₩6.45b worth of receivables due within a year. So its liabilities total ₩6.33b more than the combination of its cash and short-term receivables.

Given eSang NetworksLtd has a market capitalization of ₩67.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, eSang NetworksLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that eSang NetworksLtd's load is not too heavy, because its EBIT was down 59% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is eSang NetworksLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. eSang NetworksLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, eSang NetworksLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about eSang NetworksLtd's liabilities, but we can be reassured by the fact it has has net cash of ₩12.0b. So although we see some areas for improvement, we're not too worried about eSang NetworksLtd's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with eSang NetworksLtd .

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.

When trading eSang NetworksLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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