Is N Citron (KOSDAQ:101400) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, N Citron, Inc. (KOSDAQ:101400) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for N Citron

How Much Debt Does N Citron Carry?

The image below, which you can click on for greater detail, shows that N Citron had debt of ₩3.51b at the end of September 2024, a reduction from ₩5.39b over a year. But on the other hand it also has ₩14.5b in cash, leading to a ₩10.9b net cash position.

How Healthy Is N Citron's Balance Sheet?

According to the last reported balance sheet, N Citron had liabilities of ₩7.16b due within 12 months, and liabilities of ₩2.06b due beyond 12 months. Offsetting this, it had ₩14.5b in cash and ₩7.60b in receivables that were due within 12 months. So it actually has ₩12.8b more liquid assets than total liabilities.

This excess liquidity is a great indication that N Citron's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, N Citron boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is N Citron'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 N Citron wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to ₩38b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is N Citron?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year N Citron had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩1.9b of cash and made a loss of ₩153m. Given it only has net cash of ₩10.9b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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, we've discovered 1 warning sign for N Citron that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.