Is Vessel (KOSDAQ:177350) Using Debt In A Risky Way?

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. We can see that Vessel Co., Ltd. (KOSDAQ:177350) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Vessel

What Is Vessel's Debt?

The image below, which you can click on for greater detail, shows that Vessel had debt of ₩27.1b at the end of September 2020, a reduction from ₩34.7b over a year. On the flip side, it has ₩10.7b in cash leading to net debt of about ₩16.3b.

A Look At Vessel's Liabilities

The latest balance sheet data shows that Vessel had liabilities of ₩57.4b due within a year, and liabilities of ₩7.87b falling due after that. Offsetting this, it had ₩10.7b in cash and ₩858.3m in receivables that were due within 12 months. So its liabilities total ₩53.7b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩64.8b, so it does suggest shareholders should keep an eye on Vessel's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Vessel 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.

In the last year Vessel had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩47b. We would much prefer see growth.

Caveat Emptor

While Vessel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩3.9b at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of ₩3.8b into a profit. In the meantime, we consider the stock very 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. To that end, you should learn about the 4 warning signs we've spotted with Vessel (including 1 which is a bit unpleasant) .

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.

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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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