Is LivefinancialLtd (KOSDAQ:036170) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Livefinancial Co.,Ltd. (KOSDAQ:036170) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for LivefinancialLtd

What Is LivefinancialLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that LivefinancialLtd had ₩15.0b of debt in September 2020, down from ₩19.4b, one year before. But it also has ₩69.6b in cash to offset that, meaning it has ₩54.7b net cash.

A Look At LivefinancialLtd's Liabilities

The latest balance sheet data shows that LivefinancialLtd had liabilities of ₩21.3b due within a year, and liabilities of ₩3.17b falling due after that. On the other hand, it had cash of ₩69.6b and ₩5.34b worth of receivables due within a year. So it actually has ₩50.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that LivefinancialLtd's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that LivefinancialLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is LivefinancialLtd'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.

In the last year LivefinancialLtd had a loss before interest and tax, and actually shrunk its revenue by 5.1%, to ₩13b. That's not what we would hope to see.

So How Risky Is LivefinancialLtd?

Although LivefinancialLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩339m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - LivefinancialLtd has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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