Is Nepes (KOSDAQ:033640) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Nepes Corporation (KOSDAQ:033640) 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nepes

How Much Debt Does Nepes Carry?

You can click the graphic below for the historical numbers, but it shows that Nepes had ₩419.5b of debt in September 2024, down from ₩632.8b, one year before. However, because it has a cash reserve of ₩73.8b, its net debt is less, at about ₩345.8b.

How Healthy Is Nepes' Balance Sheet?

According to the last reported balance sheet, Nepes had liabilities of ₩343.3b due within 12 months, and liabilities of ₩180.6b due beyond 12 months. Offsetting this, it had ₩73.8b in cash and ₩44.1b in receivables that were due within 12 months. So it has liabilities totalling ₩406.0b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩163.5b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Nepes would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Nepes'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.

Over 12 months, Nepes made a loss at the EBIT level, and saw its revenue drop to ₩478b, which is a fall of 4.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Nepes produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩39b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩139b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Nepes is showing 1 warning sign in our investment analysis , you should know about...

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.