POINT ENGINEERINGLtd (KOSDAQ:256630) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that POINT ENGINEERING Co.,Ltd. (KOSDAQ:256630) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. 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.

See our latest analysis for POINT ENGINEERINGLtd

How Much Debt Does POINT ENGINEERINGLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 POINT ENGINEERINGLtd had debt of ₩23.5b, up from ₩22.0b in one year. However, it does have ₩36.6b in cash offsetting this, leading to net cash of ₩13.1b.

A Look At POINT ENGINEERINGLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that POINT ENGINEERINGLtd had liabilities of ₩17.9b due within 12 months and liabilities of ₩10.1b due beyond that. On the other hand, it had cash of ₩36.6b and ₩4.68b worth of receivables due within a year. So it actually has ₩13.2b more liquid assets than total liabilities.

This surplus suggests that POINT ENGINEERINGLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, POINT ENGINEERINGLtd 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 you can't view debt in total isolation; since POINT ENGINEERINGLtd will need earnings to service that debt. 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.

Over 12 months, POINT ENGINEERINGLtd made a loss at the EBIT level, and saw its revenue drop to ₩25b, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is POINT ENGINEERINGLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months POINT ENGINEERINGLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩3.7b and booked a ₩6.3b accounting loss. But the saving grace is the ₩13.1b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for POINT ENGINEERINGLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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.