MEGAELECTRONICS (KOSDAQ:226590) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that MEGAELECTRONICS Co., Ltd. (KOSDAQ:226590) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does MEGAELECTRONICS Carry?

You can click the graphic below for the historical numbers, but it shows that MEGAELECTRONICS had ₩10.1b of debt in March 2025, down from ₩16.3b, one year before. However, because it has a cash reserve of ₩6.99b, its net debt is less, at about ₩3.07b.

A Look At MEGAELECTRONICS' Liabilities

Zooming in on the latest balance sheet data, we can see that MEGAELECTRONICS had liabilities of ₩7.70b due within 12 months and liabilities of ₩3.78b due beyond that. On the other hand, it had cash of ₩6.99b and ₩12.4b worth of receivables due within a year. So it actually has ₩7.88b more liquid assets than total liabilities.

This surplus suggests that MEGAELECTRONICS has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

View our latest analysis for MEGAELECTRONICS

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Looking at its net debt to EBITDA of 0.40 and interest cover of 5.6 times, it seems to us that MEGAELECTRONICS is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. We also note that MEGAELECTRONICS improved its EBIT from a last year's loss to a positive ₩6.2b. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MEGAELECTRONICS's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, MEGAELECTRONICS saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

MEGAELECTRONICS's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. Looking at all this data makes us feel a little cautious about MEGAELECTRONICS's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 instance, we've identified 3 warning signs for MEGAELECTRONICS (1 can't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.