David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CUROCOM Co., Ltd. (KOSDAQ:040350) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for CUROCOM
What Is CUROCOM's Debt?
You can click the graphic below for the historical numbers, but it shows that CUROCOM had ₩24.5b of debt in December 2020, down from ₩32.2b, one year before. On the flip side, it has ₩1.27b in cash leading to net debt of about ₩23.2b.
How Strong Is CUROCOM's Balance Sheet?
The latest balance sheet data shows that CUROCOM had liabilities of ₩28.2b due within a year, and liabilities of ₩5.32b falling due after that. Offsetting this, it had ₩1.27b in cash and ₩9.61b in receivables that were due within 12 months. So its liabilities total ₩22.6b more than the combination of its cash and short-term receivables.
Of course, CUROCOM has a market capitalization of ₩156.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is CUROCOM's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year CUROCOM's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Caveat Emptor
Importantly, CUROCOM had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩6.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩24b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with CUROCOM (at least 2 which are concerning) , and understanding them should be part of your investment process.
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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About KOSDAQ:A040350
CreoSGLtd
Develops software solutions for financial institutions in South Korea.
Mediocre balance sheet low.
