Is Charm EngineeringLtd (KRX:009310) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Charm Engineering Co.,Ltd. (KRX:009310) makes use of debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Charm EngineeringLtd

What Is Charm EngineeringLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Charm EngineeringLtd had ₩22.4b of debt in September 2024, down from ₩34.0b, one year before. However, it does have ₩30.1b in cash offsetting this, leading to net cash of ₩7.66b.

A Look At Charm EngineeringLtd's Liabilities

The latest balance sheet data shows that Charm EngineeringLtd had liabilities of ₩47.1b due within a year, and liabilities of ₩500.6b falling due after that. On the other hand, it had cash of ₩30.1b and ₩366.7b worth of receivables due within a year. So its liabilities total ₩150.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩28.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Charm EngineeringLtd would probably need a major re-capitalization if its creditors were to demand repayment. Charm EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 Charm 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, Charm EngineeringLtd made a loss at the EBIT level, and saw its revenue drop to ₩70b, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Charm EngineeringLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Charm EngineeringLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩13b of cash and made a loss of ₩22b. However, it has net cash of ₩7.66b, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 2 warning signs with Charm EngineeringLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.