Here's Why Lumens (KOSDAQ:038060) Can Afford Some 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. We note that Lumens Co., Ltd. (KOSDAQ:038060) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lumens

What Is Lumens's Net Debt?

As you can see below, Lumens had ₩69.4b of debt at September 2020, down from ₩76.8b a year prior. However, because it has a cash reserve of ₩21.4b, its net debt is less, at about ₩48.0b.

A Look At Lumens's Liabilities

The latest balance sheet data shows that Lumens had liabilities of ₩146.3b due within a year, and liabilities of ₩9.81b falling due after that. Offsetting these obligations, it had cash of ₩21.4b as well as receivables valued at ₩75.7b due within 12 months. So it has liabilities totalling ₩59.1b more than its cash and near-term receivables, combined.

Lumens has a market capitalization of ₩139.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lumens's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Lumens made a loss at the EBIT level, and saw its revenue drop to ₩317b, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did Lumens'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 ₩28b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩2.3b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 Lumens is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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