Is NEXTCHIP (KOSDAQ:092600) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, NEXTCHIP Co., Ltd. (KOSDAQ:092600) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for NEXTCHIP

How Much Debt Does NEXTCHIP Carry?

The image below, which you can click on for greater detail, shows that at December 2020 NEXTCHIP had debt of ₩34.8b, up from ₩17.4b in one year. However, its balance sheet shows it holds ₩43.8b in cash, so it actually has ₩9.00b net cash.

A Look At NEXTCHIP's Liabilities

The latest balance sheet data shows that NEXTCHIP had liabilities of ₩27.3b due within a year, and liabilities of ₩47.2b falling due after that. On the other hand, it had cash of ₩43.8b and ₩9.91b worth of receivables due within a year. So its liabilities total ₩20.8b more than the combination of its cash and short-term receivables.

NEXTCHIP has a market capitalization of ₩103.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, NEXTCHIP also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NEXTCHIP 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, NEXTCHIP reported revenue of ₩88b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is NEXTCHIP?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that NEXTCHIP 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 ₩12b and booked a ₩16b accounting loss. But at least it has ₩9.00b on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that NEXTCHIP is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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. 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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