Is Cloud AirLtd (KOSDAQ:036170) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Cloud Air Co.,Ltd. (KOSDAQ:036170) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Cloud AirLtd

What Is Cloud AirLtd's Debt?

The image below, which you can click on for greater detail, shows that Cloud AirLtd had debt of ₩7.30b at the end of December 2020, a reduction from ₩8.04b over a year. However, it does have ₩72.0b in cash offsetting this, leading to net cash of ₩64.7b.

A Look At Cloud AirLtd's Liabilities

The latest balance sheet data shows that Cloud AirLtd had liabilities of ₩18.0b due within a year, and liabilities of ₩2.96b falling due after that. Offsetting these obligations, it had cash of ₩72.0b as well as receivables valued at ₩5.61b due within 12 months. So it actually has ₩56.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that Cloud AirLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Cloud AirLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cloud AirLtd 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 Cloud AirLtd's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Cloud AirLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Cloud AirLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩1.1b and booked a ₩12b accounting loss. With only ₩64.7b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 4 warning signs for Cloud AirLtd you should be aware of, and 1 of them shouldn't be ignored.

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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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.
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