Here's Why Neosem (KOSDAQ:253590) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Neosem Inc. (KOSDAQ:253590) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Neosem

What Is Neosem's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Neosem had ₩2.76b of debt in June 2024, down from ₩22.2b, one year before. But on the other hand it also has ₩56.9b in cash, leading to a ₩54.1b net cash position.

A Look At Neosem's Liabilities

The latest balance sheet data shows that Neosem had liabilities of ₩16.2b due within a year, and liabilities of ₩3.75b falling due after that. Offsetting this, it had ₩56.9b in cash and ₩4.80b in receivables that were due within 12 months. So it can boast ₩41.7b more liquid assets than total liabilities.

This surplus suggests that Neosem has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Neosem has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Neosem's load is not too heavy, because its EBIT was down 73% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Neosem's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Neosem 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. Over the most recent three years, Neosem recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Neosem has ₩54.1b in net cash and a decent-looking balance sheet. So we don't have any problem with Neosem's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Neosem has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.