ASICLAND (KOSDAQ:445090) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies ASICLAND Co., Ltd. (KOSDAQ:445090) makes use of debt. But should shareholders be worried about its use of debt?

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 ASICLAND

How Much Debt Does ASICLAND Carry?

The image below, which you can click on for greater detail, shows that at June 2024 ASICLAND had debt of ₩24.6b, up from ₩7.80b in one year. However, it does have ₩38.5b in cash offsetting this, leading to net cash of ₩14.0b.

How Strong Is ASICLAND's Balance Sheet?

We can see from the most recent balance sheet that ASICLAND had liabilities of ₩41.0b falling due within a year, and liabilities of ₩15.7b due beyond that. Offsetting these obligations, it had cash of ₩38.5b as well as receivables valued at ₩10.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩7.90b.

Since publicly traded ASICLAND shares are worth a total of ₩275.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ASICLAND 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 it is future earnings, more than anything, that will determine ASICLAND'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.

Over 12 months, ASICLAND made a loss at the EBIT level, and saw its revenue drop to ₩72b, which is a fall of 5.4%. That's not what we would hope to see.

So How Risky Is ASICLAND?

Although ASICLAND had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩1.3b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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, we've discovered 3 warning signs for ASICLAND (1 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.