Is LS Networks (KRX:000680) A Risky Investment?

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 LS Networks Corporation Limited (KRX:000680) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for LS Networks

How Much Debt Does LS Networks Carry?

The image below, which you can click on for greater detail, shows that at September 2020 LS Networks had debt of ₩563.6b, up from ₩488.5b in one year. However, it also had ₩114.9b in cash, and so its net debt is ₩448.8b.

How Healthy Is LS Networks's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LS Networks had liabilities of ₩608.6b due within 12 months and liabilities of ₩129.8b due beyond that. Offsetting these obligations, it had cash of ₩114.9b as well as receivables valued at ₩41.3b due within 12 months. So it has liabilities totalling ₩582.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩231.9b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, LS Networks would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LS Networks 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, LS Networks made a loss at the EBIT level, and saw its revenue drop to ₩320b, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did LS Networks's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩41b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost ₩9.6b in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. For instance, we've identified 1 warning sign for LS Networks that you should be aware of.

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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