Here's Why Nepes Ark (KOSDAQ:330860) Can Afford Some Debt

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 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. As with many other companies Nepes Ark Corporation (KOSDAQ:330860) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nepes Ark

What Is Nepes Ark's Net Debt?

As you can see below, Nepes Ark had ₩147.8b of debt at March 2024, down from ₩166.8b a year prior. However, it does have ₩52.8b in cash offsetting this, leading to net debt of about ₩95.0b.

How Strong Is Nepes Ark's Balance Sheet?

The latest balance sheet data shows that Nepes Ark had liabilities of ₩76.4b due within a year, and liabilities of ₩81.8b falling due after that. Offsetting these obligations, it had cash of ₩52.8b as well as receivables valued at ₩30.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩75.1b.

This deficit isn't so bad because Nepes Ark is worth ₩300.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nepes Ark'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.

Over 12 months, Nepes Ark made a loss at the EBIT level, and saw its revenue drop to ₩131b, which is a fall of 9.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Nepes Ark produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩22b. 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 ₩25b into a profit. So in short it's a really risky stock. For riskier companies like Nepes Ark I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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