Is NARA CELLAR (KOSDAQ:405920) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that NARA CELLAR Co., Ltd. (KOSDAQ:405920) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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.

Check out our latest analysis for NARA CELLAR

What Is NARA CELLAR's Debt?

The image below, which you can click on for greater detail, shows that NARA CELLAR had debt of ₩38.3b at the end of March 2024, a reduction from ₩46.5b over a year. However, it also had ₩9.52b in cash, and so its net debt is ₩28.8b.

How Strong Is NARA CELLAR's Balance Sheet?

We can see from the most recent balance sheet that NARA CELLAR had liabilities of ₩50.7b falling due within a year, and liabilities of ₩13.8b due beyond that. Offsetting these obligations, it had cash of ₩9.52b as well as receivables valued at ₩12.3b due within 12 months. So it has liabilities totalling ₩42.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩45.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NARA CELLAR will need earnings to service that debt. 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 NARA CELLAR had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₩84b. That makes us nervous, to say the least.

Caveat Emptor

While NARA CELLAR's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩1.6b. 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 ₩13b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 learn about the 4 warning signs we've spotted with NARA CELLAR (including 3 which are potentially serious) .

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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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.

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