Is NEXTCHIP (KOSDAQ:092600) 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. We can see that NEXTCHIP Co., Ltd. (KOSDAQ:092600) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is NEXTCHIP's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 NEXTCHIP had debt of ₩37.3b, up from ₩16.6b in one year. However, it does have ₩45.3b in cash offsetting this, leading to net cash of ₩7.93b.

How Healthy Is NEXTCHIP's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NEXTCHIP had liabilities of ₩26.9b due within 12 months and liabilities of ₩41.8b due beyond that. Offsetting this, it had ₩45.3b in cash and ₩9.39b in receivables that were due within 12 months. So it has liabilities totalling ₩14.0b more than its cash and near-term receivables, combined.

Since publicly traded NEXTCHIP shares are worth a total of ₩83.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is NEXTCHIP'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, NEXTCHIP reported revenue of ₩84b, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is NEXTCHIP?

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 NEXTCHIP had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩12b of cash and made a loss of ₩6.5b. But at least it has ₩7.93b on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for NEXTCHIP (of which 1 is potentially serious!) 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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