Is Micro Contact Solution (KOSDAQ:098120) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Micro Contact Solution Co., Ltd. (KOSDAQ:098120) makes use of debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Micro Contact Solution's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Micro Contact Solution had debt of ₩2.39b, up from ₩375.0m in one year. But it also has ₩26.1b in cash to offset that, meaning it has ₩23.7b net cash.

How Strong Is Micro Contact Solution's Balance Sheet?

We can see from the most recent balance sheet that Micro Contact Solution had liabilities of ₩7.96b falling due within a year, and liabilities of ₩4.62b due beyond that. Offsetting this, it had ₩26.1b in cash and ₩14.0b in receivables that were due within 12 months. So it actually has ₩27.5b more liquid assets than total liabilities.

This surplus suggests that Micro Contact Solution is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Micro Contact Solution has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Micro Contact Solution

Even more impressive was the fact that Micro Contact Solution grew its EBIT by 102% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Micro Contact Solution'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Micro Contact Solution may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Micro Contact Solution produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Micro Contact Solution has net cash of ₩23.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 102% year-on-year EBIT growth. So we don't think Micro Contact Solution's use of debt is risky. 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. For example - Micro Contact Solution has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.